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Fiscal Discipline as a Social Norm: The European Stability Pact

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  • Jean-Paul Fitoussi

    (OFCE)

  • Francesco Saraceno

    (OFCE)

Abstract

This paper reviews the arguments for and against the “Stability and Growth Pact.” We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be used to yield opposite and plausible conclusions. Empirical evidence in favor of a Pact-like rule is also scant. We therefore suggest the view that the Stability Pact is a public social norm, that countries obey in order to preserve reputation among the other members of the European Union. Using this extreme—but not implausible—hypothesis, we build a simple model similar in spirit to Akerlof’s (1980) seminal work on social norms, and we show that reputation issues may cause the emergence of a stable but inferior equilibrium. Increased heterogenity generally has the effect of further reducing aggregate welfare; we conclude that the problems posed by the Pact/social norm are likely to increase following the enlargement, when a number of countries anxious to prove their “soundness” joined the club.

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/9909.

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Date of creation: Dec 2008
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Publication status: Published in Journal of Public Economic Theory, 2008, vol. 10, pp.1143-1168
Handle: RePEc:spo:wpmain:info:hdl:2441/9909

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Citations

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Cited by:
  1. Jérôme Creel & Paul Hubert & Francesco Saraceno, 2014. "French Public Finances at Risk?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 1-19, Februar.
  2. Jean-Paul Fitoussi & Francesco Saraceno, 2007. "Fiscal Discipline as a Social Norm: The European Stability Pact," Documents de Travail de l'OFCE 2007-22, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Shirai, Sayuri, 2009. "Euの通貨統合と金融・財政政策の規律
    [EU Currency Union and Disciplines for Financial・Moneatry Policies]
    ," MPRA Paper 15713, University Library of Munich, Germany.
  4. Jérôme Creel & Paul Hubert & Francesco Saraceno,, 2013. "Assessing future sustainability of french public finances," Documents de Travail de l'OFCE 2013-11, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Baldi, Guido, 2013. "Fiscal Policy Institutions and Economic Transition in North Africa," MPRA Paper 48677, University Library of Munich, Germany.
  6. Frédéric Marty, 2007. "Partenariats public-privé, règles de discipline budgétaire, comptabilité patrimoniale et stratégies de hors bilan," Documents de Travail de l'OFCE 2007-29, Observatoire Francais des Conjonctures Economiques (OFCE).

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