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Fiscal Discipline as a Social Norm: The European Stability Pact

  • Jean-Paul Fitoussi


  • Francesco Saraceno


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
Date of revision:
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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  1. Jérôme Creel & Paola Veroni & Francesco Saraceno, 2007. "Has the Golden Rule of Public Finance Made a difference in the UK," Working Papers hal-00972843, HAL.
  2. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 65-113, 04.
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  23. Yash P. Mehra, 1992. "Deficits and long-term interest rates: an empirical note," Working Paper 92-02, Federal Reserve Bank of Richmond.
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