Fiscal Discipline and Flexibility in Emu: The Implementation of the Stability and Growth Pact

Oxford Review of Economic Policy, Vol. 14, No. 3, Autumn 1998

Posted: 23 Mar 1999

See all articles by Marco Buti

Marco Buti

European Commission, DG II

Daniele Franco

Bank of Italy

Hedwig Ongena

European Union - European Commission

Abstract

Fiscal discipline to safeguard the credibility of the single monetary authority and fiscal flexibility to respond to country-specific shocks are two core principles governing budgetary policy in EMU. The Stability and Growth Pact aims at ensuring the first objective. To comply with the requirements of the pact, EU members need to achieve a "close to balance or surplus" position and change their budgetary behavior in periods of cyclical upturns by refraining from spending the "growth dividend". Past experience shows that fiscal laxity does not buy more effective stabilization. Once EMU countries have achieved their medium-term target, their automatic stabilizers will be able to operate fully, thus helping in smoothing out cyclical fluctuations. The main potential problems in the implementation of the pact may arise in the early years of EMU, during the transition to a balanced budget, in the event of a slow-down in economic activity.

Suggested Citation

Buti, Marco and Franco, Daniele and Ongena, Hedwig, Fiscal Discipline and Flexibility in Emu: The Implementation of the Stability and Growth Pact. Oxford Review of Economic Policy, Vol. 14, No. 3, Autumn 1998. Available at SSRN: https://ssrn.com/abstract=139801

Marco Buti

European Commission, DG II ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium
+32 2 296 2246 (Phone)
+32 2 299 3505 (Fax)

Daniele Franco

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 06 4792 2793 (Phone)
+39 06 4792 2324 (Fax)

Hedwig Ongena

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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