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A new framework for fiscal policy consolidation in Europe

  • Peter Bofinger
  • Stefan Ried

Current developments in Greece make clear that the rules of the European Stability and Growth Pact (SGP) were neither strict enough nor enforced strictly enough. To deal with the ongoing fiscal exit and its related phenomena of crisis, we propose a new framework for fiscal policy consolidation in Europe. Centre stage takes a European Consolidation Pact (ECP) supplementing the SGP, with five distinguishing features. First, members are obliged to detail a path to balancing their budgets, including a concrete course to cutting non-cyclical government expenditure, and second to implement an automatic tax increase law in case of straying from the defined path. Third, pact members may apply for ECP guarantees for each newly issued government debt that is in line with the specified path. These guarantees are, fourth, paid for by a percentage fee. Fifth, non-compliance with the automatic tax increase law or voluntary exit from the consolidation pact leaves future government bond issues without ECP guarantees: either the country does not need the guarantee any longer, or it is willing to default. In the latter case, the new framework spells out the details of an orderly government default.

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File URL: http://hdl.handle.net/10.1007/s10272-010-0338-3
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Article provided by Springer in its journal Intereconomics.

Volume (Year): 45 (2010)
Issue (Month): 4 (July)
Pages: 203-211

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Handle: RePEc:spr:intere:v:45:y:2010:i:4:p:203-211
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  1. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  2. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  3. Konrad, Kai A., 2010. "Rettung durch eine beschränkte Garantie," Munich Reprints in Economics 22080, University of Munich, Department of Economics.
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