How can the stability and growth pact be improved to achieve both stronger discipline and higher flexibility?

Intereconomics

Volumn 38, Issue 1, 2003, Pages 10-15

  Eijffinger, Sylvester C W ^a,b,c  

^a TILBURG UNIVERSITY   (Netherlands)

^b CEPR   (United Kingdom)

^c CESIFO   (Germany)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33645908268     PISSN: 00205346     EISSN: 1613964X     Source Type: Journal    
DOI: 10.1007/BF03031833     Document Type: Article

References (33)

1. This article is a summary of an extensive study. See M. Buti, S. Eijffinger, D. Franco: Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?, CEPR Discussion Paper No. 3692, 2002.
2. On the other hand, because of the common monetary policy, in the euro area monetary shocks should not take place anymore. See J. Frakel, A. Rose: The Endogeneity of the Optimum Currency Area Criteria, in: Economic Journal, Vol. 108, 1998, pp. 1009-25.
3. M. Buti, B. Martinot: Open Issues in the Implementation of the Stability and Growth Pact, in: National Institute Economic Review, Vol. 174, 2000, pp. 92-104
4. S. Korkman: Fiscal Policy Coordination in EMU: Should it Go Beyond the SGP?, in: A. Brunila, M. Buti, D. Franco (eds.): The Stability and Growth Pact-The Architecture of Fiscal Policy in EMU, Basingstoke 2001, Palgrave, pp. 287-310.
5. As shown in M. Buti, A. Sapir (eds.): Economic Policy in EMU, Oxford 1998, Oxford University Press, budgetary consolidation in Germany, France and Italy-three of the countries which did not meet the close-to-balance rule of the SGP-was considerably worse than the already timid efforts which were planned in their stability programmes. This contrasts sharply with the rest of the euro area members whose budgetary out-turn was better than planned.
6. M. Buti, G. Giudice: Maastricht's Fiscal Rules at Ten: An Assessment, in: Journal of Common Market Studies, Vol. 40, No. 5, 2002, pp. 823-47.
7. Buti shows that negative deviations from the targets in cyclicallyadjusted terms set out in the Stability Programmes appear larger and more systematic in election years than in other years
8. see M. Buti: Public Finances in the Early Years of EMU: Adjusting to the New Policy Regime, paper prepared for a workshop of the Foundation for the Modernisation of Spain, October 2002. With a different approach, von Hagen finds that in the period 1998-2001 the expansionary stance in the year preceding the election had been twice as large as that in other years
9. see J. von Hagen: More Growth for Stability-Reflections on Fiscal Policy in Euroland, ZEI Policy Paper, June 2002.
10. The idea that investment is reduced more than other items during fiscal consolidations is largely shared in the literature
11. see H. Oxley, J.R Martin: Controlling Government Spending and Deficits: Trends in the 80s and Prospects for the 90s, OECD Economic Studies, 17, 1991, pp. 145-189
12. and J. de Haan, J.E. Sturm, B.J. Sikken: Government Capital Formation: Explaining the Decline, in: Review of World Economics, Vol. 132, 1996, pp. 55-74.
13. F. Balassone and D. Franco: Public Investment, the Stability Pact and the Golden Rule, in: Fiscal Studies, Vol. 21, No. 2, 2002, pp. (207-29) show how the introduction of a deficit ceiling can imply a reduction in investment in a two period model where a policymaker with a finite horizon maximises disposable income and the latter is positively affected by investment with a lag.
14. For a theoretical model, see A. Razin, E. Sadka: The Stability and Growth Pact as an Impediment to Privatizing Social Security, CEPR Discussion Paper, No. 362, 2002.
15. According to E. BaIIabriga and C. Martinez-Mongay (Has EMU Shifted Policy?, European Commission, Economic Papers, No. 166, 2002) EMU has shifted fiscal policy to a shorter horizon compared with the pre-EMU period.
16. This article is a summary of an extensive study. See M. Buti, S. Eijffinger, D. Franco: Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?, CEPR Discussion Paper No. 3692, 2002.
17. Our proposals are largely consistent with the new strategy of implementation of the SGP put forward by the Commission on 24 September 2002. In order to tackle effectively the imbalances of Germany, France, Italy and Portugal, the Commission restates the 3% of GDP as a "hard" ceiling for the deficit, suggests focusing on underlying balances when assessing compliance with the close-to-balance rule of the Pact, requires attaining an annual minimum structural adjustment of 0.5% of GDP for the countries still away from close-to-balance and asks for a commitment to accelerate the adjustment in times of boom.
18. European Commission: Public Finances in EMU-2002, European Economy, 3, 2002.
19. M. Buti, D. Franco, H. Ongena: Budgetary Policies During Recessions-Retrospective Application of the Stability and Growth Pact to the Post-War Period, in: Recherches Economiques de Louvain, Vol. 63, No. 4, 1997, pp. (321-66). The risk of breaching the 3% threshold would be further reduced by the introduction of rainy-day funds.
20. Economic Policy Committee: Budgetary Challenges Posed by Ageing Populations: the Impact of Public Spending on Pensions, Health and Long-term Care for the Elderly and Possible Indicators of the Long-term Sustainability of Public Finances, 2001, EPC/ECFIN/655.
21. It would also be useful to attribute the responsibility for projections to independent authorities or to competing institutions. See D. Franco, M.R. Marino: The Role of Forecasts in Social Security Policy, in: Giornale degli economisti, forthcoming.
22. See the exercises in B. Delbecque, H. Bogaert: L'incidence de la dette publique et du viellissement démographique sur la conduite de la politique budgétaire: une etude théorique appliquee au cas de la Belgique, Bureau du Plan-Planning Papers, No. 70, November 1994.
23. and D. Franco, T. Munzi: Ageing and Fiscal Policies in the European Union, in: European Economy, Reports and Studies, 4, 1997, pp. 239-388.
24. See E Balassone, D. Franco: Assessing Fiscal Sustainability: a Review of Methods with a View to EMU, in: Banca d'ltalia: Structural Budget Balances, Rome 2000, pp. 22-60, and the other essays in this volume.
25. IMF: Fiscal Policy and Macroeconomic Stability, May 2001.
26. A. Kilpatrick: Transparent Frameworks, Fiscal Rules and Policy-Making Under Uncertainty, in: Banca d'ltalia: Fiscal Rules, Rome 2001, pp. 171-216.
27. O J. Janssen: New Zealand's Fiscal Policy Framework: Experience and Evolution, in: Banca d'ltalia: Fiscal Rules, Rome 2001, pp. 171-216.
28. The measurement of one-off effects in public budgets raises some methodological problems. Public spending normally reflects several measures and events with temporary expansionary or restrictive effects. It may probably be useful to consider only the measures having transitory effects on public revenues (e.g. sales of assets, anticipation of tax payments, tax amnesties). Guidelines concerning the definition of one-off measures would have to be agreed in advance.
29. This is one of the salient features of the new strategy for the implementation of the SGP put forward by the Commission on 24 September 2002. The Commission suggests defining structural adjustment as a change in the budget balance net of cyclical effects and of one-off measures. With the exception of France, the Eurogroup on 7 October 2002. broadly endorsed the Commission proposals.
30. See F. Balassone, D. Franco, S. Zotteri: Fiscal Rules: Indicators and Underlying Statistical Frameworks, Banca d'ltalia 2002, mimeo.
31. A first step in this direction is represented by the indication to introduce long-term expenditure projections in the stability programmes.
32. See B. Knight, A. Levinson: Rainy Day Funds and State Government Savings, in: National Tax Journal, Vol. 52, No. 3, 1999, pp. 459.-472
33. and L. McGranahan: State Budgets and the Business Cycle: Implications for the Federal Balanced Budget Amendment Debate, Federal Reserve Bank of Chicago 1999, mimeo, for the US experience.