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Institutions for Fiscal Stability

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  • Barry Eichengreen

Abstract

This paper reviews the controversy over Europe's Stability and Growth Pact and offers a proposal for its reform. It argues that Europe would be best served by focusing on the fundamental causes of unsustainable debts — public enterprises that are too big to fail, unfunded public pension schemes that are too big to ignore, inefficient and costly labor market and social welfare problems, and budget making institutions that create common pool and free-rider problems — rather than on arbitrary numerical indicators like whether the budget deficit is above or below 3 percent of GDP. It proposes defining an index of institutional reform with, say, a point each for reform of budget making arrangements, reform of public pension schemes, and reform of labor markets and unemployment insurance. Countries receiving three points would be exempt from the Pact's numerical guidelines, since there is no reason to think that they will be prone to chronic deficits. The others, whose weak institutions render them susceptible to chronic deficits, would in contrast still be subject to its warnings, sanctions and fines.(JEL E0, F4)

Suggested Citation

  • Barry Eichengreen, 2004. "Institutions for Fiscal Stability," CESifo Economic Studies, CESifo Group, vol. 50(1), pages 1-25.
    • Handle: RePEc:oup:cesifo:v:50:y:2004:i:1:p:1-25.
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    File URL: http://hdl.handle.net/10.1093/cesifo/50.1.1
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    Cited by:

    1. Wenzel, Heinz-Dieter & Lackenbauer, Jörg & Brösamle, Klaus J., 2004. "Public Debt and the Future of the EU's Stability and Growth Pact," BERG Working Paper Series 50, Bamberg University, Bamberg Economic Research Group.
    2. Caio K. Koch-Weser & Dietmar Hornung & Horst Tomann, 2004. "Code of Good Practices on Fiscal Transparency," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 57(18), pages 03-10, September.
    3. Lindbeck, Assar & Niepelt, Dirk, 2004. "Improving the SGP: Taxes and Delegation rather than Fines," Working Paper Series 633, Research Institute of Industrial Economics.
    4. Barry Eichengreen, 2010. "The Breakup of the Euro Area," NBER Chapters, in: Europe and the Euro, pages 11-51, National Bureau of Economic Research, Inc.
    5. Szapáry, György & Orbán, Gábor, 2004. "A stabilitási és növekedési paktum az új tagállamok szemszögéből [The Stabilization and Growth Pact in the light of the new EU member-states]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 810-831.
    6. repec:bas:econth:y:2012:i:5:p:3-29 is not listed on IDEAS
    7. Beetsma, Roel M.W.J. & Debrun, Xavier, 2007. "The new stability and growth pact: A first assessment," European Economic Review, Elsevier, vol. 51(2), pages 453-477, February.
    8. Marek Lubiński, 2011. "Przyszłość paktu stabilności i wzrostu," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 19-42.
    9. Jonas Fischer & Lars Jonung & Martin Larch, 2007. "101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey," European Economy - Economic Papers 2008 - 2015 267, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    10. repec:bas:econth:y:2012:i:5:p:30-54 is not listed on IDEAS
    11. Mintz, Jack M. & Smart, Michael, 2006. "Incentives for public investment under fiscal rules," Policy Research Working Paper Series 3860, The World Bank.
    12. Eichengreen, Barry, 2005. "Europe, the euro and the ECB: Monetary success, fiscal failure," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 427-439, June.
    13. Beetsma, Roel & Debrun, Xavier, 2005. "Implementing the stability and growth pact: enforcement and procedural flexibility," Working Paper Series 433, European Central Bank.
    14. Barry Eichengreen, 2010. "How Asia Can Benefit from the European Experience," Chapters, in: Masahiro Kawai & Jong-Wha Lee & Peter A. Petri & Giovanni Capanelli (ed.), Asian Regionalism in the World Economy, chapter 11, Edward Elgar Publishing.
    15. Lubiński, Marek, . "Przyszłość paktu stabilności i wzrostu," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2011(1-2).
    16. Wojciech Paczynski, 2003. "ECB Decision-making and the Status of the Eurogroup in an Enlarged EMU," CASE Network Studies and Analyses 0262, CASE-Center for Social and Economic Research.
    17. Philipp Paulus, 2004. "The fiscal stability impact of monetary unions - looking beneath the Stability Pact debate," Otto-Wolff-Institut Discussion Paper Series 05/2004, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    18. Raffaele Fargnoli, 2020. "Adapting the EU Fiscal Governance to New Macroeconomics and Political Realities," RSCAS Working Papers 2020/03, European University Institute.
    19. Campoy Juan Cristóbal & Negrete Juan C., 2010. "Structural Reforms and Budget Deficits in a Monetary Union: A Strategic Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, July.
    20. Lars Jonung & Martin Larch, 2006. "Improving fiscal policy in the EU: the case for independent forecasts [‘Fiscal forecasting: The track record of the IMF, OECD and EC’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(47), pages 492-534.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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