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101 proposals to reform the Stability and Growth Pact. Why so many? A review

PFM, Vol. 8 No. 3, (2008)

The failure of key EU Member States to respect the requirements of the Stability and Growth Pact (SGP) a few years after its full inception in 1999 triggered a heated debate on how to reform the framework of fiscal policy coordination in the Economic and Monetary Union (EMU). This paper analyzes 101 reform proposals presented by professional academic and non-academic economists prior to March 2005, when the Council of the European Union adopted a revised version of the SGP. Each proposal is characterized by a set of variables reflecting features such as the degree of modification of the SGP, the background of its author(s), the main aim attached to fiscal policy coordination in the EMU, the timing of the proposal and the type of proposal made. Using multivariate statistical analysis, roughly four different schools of thought concerning the reform of the SGP are identified. In line with the main findings of the political economy literature, all four schools of thought share the view that in the absence of specific rules fiscal policy would lead to excessive deficits and hence affect the conduct of the common monetary policy. However, beyond this common denominator, there is no consensus on how best to co-ordinate fiscal policy.
We present several explanations for the multitude of proposals, the most important being the present lack of a consensus in the economics profession concerning the role of fiscal policy. Economists hold diverging views on the goals, instruments, efficiency and institutions for fiscal policy-making. This state of affairs is in sharp contrast to the case of monetary policy. In addition, the institutional framework for the SGP is a completely new one. The euro area is the first case where monetary policy-making is centralized while fiscal policy-making is decentralized to national governments. As long as we lack consensus on the proper role of fiscal policy, the SGP will be the subject of diverging policy recommendations.

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