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A Simple Proposal for a 'Debt-Sensitive Stability Pact'

Author

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  • Francesco Saraceno

    (Observatoire Francais des Conjonctures Economiques)

  • Paola Monperrus-Veroni

    (Observatoire Francais des Conjonctures Economiques)

Abstract

The main rationale for fiscal policy rules is the concern for long term sustainability of public finances, that in a monetary union may affect the other members. Among many other criticisms, the Stability and Growth Pact (SGP) has been seen as contradictory or incomplete because it focuses on deficit rather than debt, the main indicator of public finances' soundness. Furthermore the few references to debt that were present in the treaties are essentially ignored in actual practices. Some of the reform proposals that came out lately have addressed the issue, and tried to embed a debt criterion in the Pact. We review these proposals, and put forward our own proposed modification: the deficit ratio countries should target is weighed by their relative debt. With respect to the other proposals taking into account debt, our own has the advantages of simplicity, symmetry, and low arbitrariness. To make it politically acceptable to high debt countries, nevertheless, could require to set the targets, at least initially, at level higher than the Maastricht criteria

Suggested Citation

  • Francesco Saraceno & Paola Monperrus-Veroni, 2004. "A Simple Proposal for a 'Debt-Sensitive Stability Pact'," Macroeconomics 0406001, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0406001
    Note: Type of Document - pdf; pages: 11
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    References listed on IDEAS

    as
    1. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
    2. Buti, Marco & Eijffinger, Sylvester C.W. & Franco, Daniele, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Seminarios y Conferencias 6567, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Peter S. Heller & Sanjeev Gupta, 2002. "More Aid—Making It Work for the Poor," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 3(4), pages 131-146, October.
    4. Corsetti, Giancarlo & Devereux, Michael P. & Guiso, Luigi & Hassler, John & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2010. "The European economy," Munich Reprints in Economics 20104, University of Munich, Department of Economics.
    5. Buti, Marco, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34908, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    Cited by:

    1. Francesco Saraceno & Paola Veroni, 2005. "Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance," Sciences Po publications 2005-1, Sciences Po.
    2. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
    3. Menguy, Séverine, 2008. "A dynamic rule applied to the threshold imposed on the European budgetary deficits," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1093-1105.
    4. Adam Geršl & Martina Jašová & Jan Zápal, 2014. "Fiscal Councils and Economic Volatility," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(3), pages 190-212, June.

    More about this item

    Keywords

    Stability Pact; Fiscal policy; Debt Sustainability;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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