Stability and Growth Pact

About: Stability and Growth Pact is a research topic. Over the lifetime, 1357 publications have been published within this topic receiving 25216 citations.

Fiscal policy and monetary integration in Europe

Abstract: A popular view among economists, policymakers, and the media, is that the Maastricht Treaty and then Stability and Growth Pact have significantly impaired the ability of EU governments to conduct a stabilizing fiscal policy and to provide an adequate level of public infrastructure. In this paper, we investigate this view by estimating fiscal rules for the discretionary budget deficit over the period 1980-2002, using data on EMU countries and control groups of non-EMU EU countries and other non-EU OECD countries. We do not find much support for this view. In fact, we find that discretionary fiscal policy in EMU countries has become more countercyclical over time, following what appears to be a trend that affects other industrialized countries as well. Similarly, we find that the decline in public investment experienced over the last decade by EMU countries is part of a world-wide trend that started well before the Maastricht Treaty was signed.

Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?

Abstract: IN 2000-01 THE CURRENT account deficit of Portugal reached 10 percent of its GDP, up from 2-3 percent at the start of the 1990s. These deficits are forecast to continue in the 8-9 percent range for the indefinite future. Greece is not far behind. Its current account deficit in 2000-01 was equal to 6-7 percent of GDP, up from 1-2 percent in the early 1990s, and again, the forecasts are for deficits to remain high, in the 5-6 percent range. This is not the first time that some of the small member countries of the European Union have run large current account deficits. In the early 1980s, for example, Portugal ran deficits in excess of 10 percent of GDP. But those deficits had a very different flavor from today's: Portugal then was still reeling from its 1975 revolution, from the loss of its colonies, and from the second oil shock; the government was running a large budget deficit, in excess of 12 percent of GDP. The current account deficits were widely perceived as unsustainable, and indeed they turned out to be: between 1980 and 1987, the escudo was devalued by 60 percent, and the current account deficit was eliminated. In contrast, Portugal today is not suffering from large adverse shocks; the official budget deficit has been reduced since the early 1990s (although with some signs of relapse in 2002, as current estimates imply that Portugal may exceed the limits imposed by the 1997 Stability and Growth Pact among the countries participating in European monetary union); and financial markets show no sign of worry. The fact that both Portugal and Greece are members of both the European Union and the euro area (the group of countries that use the euro as their common currency), and the fact that they are the two poorest members of both groups, suggest a natural explanation for today's current account deficits. They are exactly what theory suggests can and should happen when countries become more closely linked in goods and financial markets. To the extent that they are the countries with higher expected rates of return, poor countries should see an increase in investment. And to the extent that they are the countries with better growth prospects, they should also see a decrease in saving. Thus, on both counts, poorer countries should run larger current account deficits, and, symmetrically, richer countries should run larger current account surpluses. This paper investigates whether this hypothesis indeed fits the facts. We conclude that it does, and that saving rather than investment is the main channel through which integration affects current account balances. We proceed in four steps. First, we use a workhorse open-economy model to show how, for poorer countries, goods and financial market integration are likely to lead to both a decrease in saving and an increase in investment, and so to a larger current account deficit. We also discuss how other, less direct implications of the process of integration, such as domestic financial liberalization, are likely to reinforce that outcome. Second, we look at panel data evidence from the countries of the Organization for Economic Cooperation and Development (OECD) since 1975. We document that the recent changes in the current account balances of Portugal and Greece are indeed part of a more general trend: the dispersion of current account positions among OECD countries has steadily increased since the early 1990s, and current account positions have become increasingly related to countries' income per capita. This trend is visible within the OECD as a whole but is stronger within the European Union, and stronger still within the euro area. The channel through which this occurs appears to be primarily a decrease in saving--typically private saving--in the countries with widening current account deficits, rather than an increase in investment. Third, we return to the cases of Portugal and Greece. …

The Stability Pact: more than a minor nuisance?

Abstract: Stability Pact More than a minor nuisance? The Stability and Growth Pact will lead member countries to aim for cyclically balanced budgets. Until this steady state is reached, Europe will continue its efforts at de.cit cutting. While so doing, politicians are less likely to undertake the dif.cult labour market reforms that are really needed. Is further .scal retrenchment wise? The paper reviews the reasons that have been advanced in favour of a Stability Pact and .nds them wanting. The most serious justi.cations, such as the systemic risk of bank crisis following a government.s failure to service its debt, can be better dealt with in other ways: for example, by prudential limits on banks. exposure to public debts. Moreover, our analysis reveals that the macroeconomic costs of the Stability Pact, while sizeable, are not as dangerous as often believed. The costs will be barely visible once the steady state is reached. The true macroeconomic costs are front loaded; they concern the next few years, after a decade already dominated by convergence efforts. — Barry Eichengreen and Charles Wyplosz

An analysis of the Stability and Growth Pact.

Abstract: We use a stylised model to analyse the Stability and Growth Pact for countries that have formed the European Monetary Union (EMU). In our model, shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully. Therefore, while governments have no incentive to sign a stability pact in the absence of a monetary union, they do so with monetary union to restrain this externality. With uncertainty, a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy. With differences in initial conditions, conflicts of interest arise. We study the Nash bargaining solution.

Fiscal Policy: Institutions Versus Rules

Abstract: The Paper explores how fiscal policy can be made both more disciplined and more counter-cyclical. It first examines whether the decline of public debts observed in the OECD area during the 1990s can be explained either by less activism or by a priority towards consolidation. It then argues that rules, for example the Stability and Growth Pact, are less likely to deliver the desired outcome than institutions. Drawing a parallel with monetary policy, it examines how a Fiscal Policy Committee could reproduce what Monetary Policy Committees have achieved in central banking.