Why has the Stability and Growth Pact Failed?
Jakob De Haan
University of Groningen - Faculty of Economics and Business; De Nederlandsche Bank; CESifo (Center for Economic Studies and Ifo Institute)
Free University Berlin - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
De Nederlandsche Bank
International Finance, Vol. 7, No. 2, pp. 235-260, 2004
This paper evaluates the Stability and Growth Pact. After briefly examining the rules in place and the experience so far, the Pact is analysed from a political economy perspective, focusing on the choice of hard versus soft law and drawing inferences from characteristics of successful fiscal rules at the state level in the USA. The main argument of the paper is that the Pact's enforcement mechanisms are too weak. It is also argued that big countries are less likely to adhere to the fiscal policy rules in place. Reform of the Pact should aim at stricter, instead of more flexible, rules and should not rely on cyclically adjusted deficit estimates.
Keywords: Stability and Growth Pact, EMU, budget discipline
JEL Classification: E61, E63Accepted Paper Series
Date posted: February 10, 2005
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