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The Impact of the Stability and Growth Pact on Real Economic

Listed author(s):
  • Paolo Savona

    (Scuola Superiore di Pubblica Amministrazione - Rome, Italy)

  • Carlo Viviani

    (LUISS 'Guido Carli' University - Rome, Italy)

The recession under way in the European Union and the threat of deflation have spawned increasing frequent calls for modification of the Stability and Growth Pact. The present article confirms the negative correlation of the rate of real output growth with that of increase in current public expenditure, but finds a positive correlation of growth with the rate of increase in public capital spending, private investment, tax to GDP ratio, and an indicator of the net profit rate. The policy prescription is for the urgent modification of the rules of the Pact, exempting public investment from its constraints subject to the assessment of the Ecofin Council. The markets would be receptive to such a change if the EU instituted clear new rules, not just reinterpreting those now in being under the pressure of contingent factors. On this basis, we find that Italy's economic crisis is due in part to the misconceived fiscal and monetary policy rules of the European Union.

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Paper provided by EconWPA in its series Public Economics with number 0403003.

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Length: 19 pages
Date of creation: 18 Mar 2004
Handle: RePEc:wpa:wuwppe:0403003
Note: Type of Document - pdf; pages: 19
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