Improving the Sgp Through a Proper Accounting of Public Investment

Blanchard, Olivier J.; Giavazzi, Francesco

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Improving the Sgp Through a Proper Accounting of Public Investment

22 Pages Posted: 23 Feb 2004

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peterson Institute for International Economics

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Date Written: February 2004

Abstract

The Stability and Growth Pact (SGP) contains a serious error: the way governments are expected to account for public investment. Correcting this error and applying, as article 104.3 of the EU Treaty allows, the current rules of the Pact to a measure of the budget where the treatment of investment expenditures is done properly would, over time, drive the debt-GDP ratio to the ratio of public capital to GDP. Excluding net public investment from the definition of the budget that is relevant for the Pact would also help in the short run, by inducing countries to shift the composition of domestic demand, rather than to reduce its level.

Keywords: EMU, stability pact

JEL Classification: E62

Suggested Citation: Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco and Giavazzi, Francesco, Improving the Sgp Through a Proper Accounting of Public Investment (February 2004). Available at SSRN: https://ssrn.com/abstract=508203