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101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey

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Listed author(s):
  • Jonas Fischer
  • Lars Jonung
  • Martin Larch

Abstract

The failure of key EU Member States to respect the requirements of the Stability and Growth Pact (SGP) a few years after its inception triggered a heated debate on how to reform the framework of fiscal policy coordination in the Economic and Monetary Union (EMU). This paper systematically analyzes 101 reform proposals presented by professional academic and non-academic economists prior to March 2005, when the Council of the European Union adopted a revised version of the SGP. Each proposal is characterized by a set of variables reflecting features such as the degree of modification of the SGP, the background of its author(s), the main aim attached to fiscal policy coordination in the EMU, the timing of the proposal and the type of proposal made. Using multivariate statistical analysis, roughly four different schools of thought concerning the reform of the SGP are identified. In line with the main findings of the political economy literature, all four schools of thought share the view that in the absence of specific rules fiscal policy would lead to excessive deficits and hence affect the conduct of the common monetary policy. However, beyond this common denominator, there is no consensus on how best to co-ordinate fiscal policy.Several explanations for the multitude of proposals are presented, the most important being the present lack of a consensus in the economics profession concerning the role of fiscal policy.

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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers 2008 - 2015 with number 267.

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Length: 48 pages
Date of creation: Jan 2007
Handle: RePEc:euf:ecopap:0267
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Keywords: Monetary union; euro; fiscal policy; Stability and Growth Pact; international policy coordination; EMU; European Union; Europe; Fischer; Jonung; Larch;

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Find related papers by JEL classification:
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
  • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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  1. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall.
  2. Barry Eichengreen, 2004. "Institutions for Fiscal Stability," CESifo Economic Studies, CESifo, vol. 50(1), pages 1-25.
  3. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
  4. Briotti, Maria Gabriella, 2005. "Economic reactions to public finance consolidation: a survey of the literature," Occasional Paper Series 38, European Central Bank.
  5. Eichengreen, Barry, 1990. "Is Europe an Optimum Currency Area?," Department of Economics, Working Paper Series qt40m5g6pp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Charles Wyplosz, 2002. "Fiscal Policy: Institutions vs. Rules," IHEID Working Papers 03-2002, Economics Section, The Graduate Institute of International Studies.
  7. Roel M. W. J. Beetsma & Xavier Debrun, 2004. "Reconciling Stability and Growth: Smart Pacts and Structural Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 431-456, November.
  8. Hicks, J. R., 1979. "Critical Essays in Monetary Theory," OUP Catalogue, Oxford University Press, number 9780198284239.
  9. Wyplosz, Charles, 2002. "Fiscal Policy: Institutions versus Rules," CEPR Discussion Papers 3238, C.E.P.R. Discussion Papers.
  10. Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1419-1447.
  11. Lars Calmfors, 2003. "Fiscal Policy to Stabilise the Domestic Economy in the EMU: What Can We Learn from Monetary Policy?," CESifo Economic Studies, CESifo, vol. 49(3), pages 319-353.
  12. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
  13. Luiz de Mello & Per Mathis Kongsrud & Robert W. R. Price, 2004. "Saving Behaviour and the Effectiveness of Fiscal Policy," OECD Economics Department Working Papers 397, OECD Publishing.
  14. De Grauwe, Paul & Vanhaverbeke, Wim, 1991. "Is Europe an Optimum Currency Area? Evidence from Regional Data," CEPR Discussion Papers 555, C.E.P.R. Discussion Papers.
  15. Michael D. Bordo & Lars Jonung, 1999. "The Future of EMU: What Does the History of Monetary Unions Tell Us?," NBER Working Papers 7365, National Bureau of Economic Research, Inc.
  16. Maria Antoinette Silgoner & Jesús Crespo-Cuaresma & Gerhard Reitschuler, 2003. "The Fiscal Smile; The Effectiveness and Limits of Fiscal Stabilizers," IMF Working Papers 03/182, International Monetary Fund.
  17. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Var är statsvetarna?
    by Martin Flodén in Ekonomistas on 2011-09-22 07:12:44
  2. ECB måste visa vägen ut!
    by Martin Flodén in Ekonomistas on 2011-09-09 04:00:45
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:

  1. Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013. "A Fiscal Union for the Euro: Some Lessons from History ," CESifo Economic Studies, CESifo, vol. 59(3), pages 449-488, September.
  2. Roel Beetsma & Heikki Oksanen, 2008. "Pensions under Ageing Populations and the EU Stability and Growth Pact ," CESifo Economic Studies, CESifo, vol. 54(4), pages 563-592, December.
  3. 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.
  4. Christian Fahrholz & Cezary Wójcik, 2010. "The Bail-Out! Positive Political Economics of Greek-type Crises in the EMU," CESifo Working Paper Series 3178, CESifo Group Munich.
  5. Manfred Weber & Karl Knappe, 2007. "Fiscal policy in EMU after the reform of the european stability and growth pact," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(4), pages 45-51, 01.
  6. Karsten Staehr, 2008. "The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe," Bank of Estonia Working Papers 2008-04, Bank of Estonia, revised 30 Oct 2008.
  7. Heikki Oksanen, 2009. "Setting targets for government budgets in the pursuit of intergenerational equity," European Economy - Economic Papers 2008 - 2015 358, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  8. Ali Bayar & Bram Smeets, 2009. "Government Deficits in the European Union: An Analysis of Entry and Exit Dynamics," CESifo Working Paper Series 2703, CESifo Group Munich.
  9. Paolo Biraschi, "undated". "Searching for the optimal EMU fiscal rule:an ex-post analysis of the SGP reform proposals," Working Papers wp2008-7, Department of the Treasury, Ministry of the Economy and of Finance.
  10. Larch, Martin & Van den Noord, Paul & Jonung, Lars, 2010. "The stability and growth pact: lessons from the great recession," MPRA Paper 27900, University Library of Munich, Germany.
  11. Bodo Herzog, 2011. "EMU at Crossroads," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(4), pages 23-29, December.
  12. Roel Beetsma & Heikki Oksanen, 2007. "Pension Systems, Ageing and the Stability and Growth Pact," CESifo Working Paper Series 2141, CESifo Group Munich.
  13. Wim Marneffe & Bas van Aarle & Wouter van der Wielen & Lode Vereeck, 2011. "The Impact of Fiscal Rules on Public Finances in the Euro Area," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(3), pages 18-26, October.
  14. Ludger Schuknecht & Philippe Moutot & Philipp Rother & Jürgen Stark, 2011. "The Stability and Growth Pact: Crisis and Reform," CESifo DICE Report, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(3), pages 10-18, October.

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