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A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact

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  • Jean-Paul Fitoussi

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Francesco Saraceno

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

This paper reviews the arguments in favour and against the "Stability and Growth Pact" signed by the countries of the Euro area. We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be reversed to yield opposite, and equally plausible conclusions. We therefore suggest the view that the stability pact is a social norm, and that adherence to that norm responds in fact to the need to preserve reputation in front of 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 paper on social norms, and we show that reputational issues may cause the emergence of a stable and inferior equilibrium. We further show that, when with the enlargement a number of countries anxious to prove their 'soundness' will join the Union, the problems posed by the pact/social norm are likely to increase.

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  • Jean-Paul Fitoussi & Francesco Saraceno, 2002. "A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact," SciencePo Working papers Main hal-01065024, HAL.
    • Handle: RePEc:hal:spmain:hal-01065024
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-01065024
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    More about this item

    Keywords

    Stability Pact; Social Norms; Stabilization; Reputation; Enlargement; Pact de stabilité; Normes sociales; Elargissement;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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