The Impact of the Stability and Growth Pact on Real Economic Growth: Automatic Mechanisms or Policy Discretion?

Review of Economic Conditions in Italy, Vol. 56, pp. 263-279, May-August 2003

19 Pages Posted: 7 Mar 2004  

Paolo Savona

Luiss University

Carlo Viviani

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Abstract

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.

Keywords: Stability Pact, Fiscal Rules, European Union, Ricardian Equivalence

JEL Classification: E62, H6

Suggested Citation

Savona, Paolo and Viviani, Carlo, The Impact of the Stability and Growth Pact on Real Economic Growth: Automatic Mechanisms or Policy Discretion?. Review of Economic Conditions in Italy, Vol. 56, pp. 263-279, May-August 2003. Available at SSRN: https://ssrn.com/abstract=512802

Paolo Savona

Luiss University ( email )

via de' Crociferi n. 41
00187 Rome, Roma
Italy

Carlo Viviani (Contact Author)

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

CHAR 10/117
Brussels, Bruxelles B-1049
Belgium

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