A much more radical and 'novel' reform proposal was put forward by Casella (1999) well
before the SGP crisis actually emerged. The idea was to replace the rules and procedures of
the SGP with a market for tradable deficit permits as an efficient mechanism for the
implementation of fiscal constraints in EMU. Such an arrangement is intended to allow
flexibility at the country level while imposing ceilings for the euro area as a whole. However,
Casella admitted that the enforcement of such a system would be weakened if governments
maintained final control over the system, due to the probability that they would negotiate
exceptions or ad hoc changes in the overall deficit ceiling. This proposal has since
disappeared from the agenda.
Advocates of economic growth: The third group comprises the advocates of economic growth,
32 economists, who, on average, entered the reform debate around half a year before
November 2003. By that time, it was already clear that neither France nor Germany, which
had been deemed to be in excessive deficit in January 2003, was able, willing or ready to take
sufficient consolidation measures to bring their deficits below the 3 % of GDP reference value
within the specified deadlines. In addition, most large euro-area economies had been
experiencing persistent low economic growth. Against this background, a considerable
number of economists, mainly from large euro-area countries, argued that by focusing
exclusively on short-term fiscal discipline, the old SGP did not ensure a sufficiently balanced
policy mix and provided insufficient scope for fiscal policy to support economic growth. This
gave rise to the perception that the SGP represented a set of rules with little economic
rationale. The possibility that the protracted slowdown of economic growth could reflect a
slowdown in the underlying growth potential, hence affecting the level of sustainable
expenditure, was either not considered or rejected.
The representatives of this group, which included a relatively large number of non-academics,
predominantly based their analysis on welfare considerations, arguing implicitly or explicitly
that putting more weight on economic growth rather than on fiscal discipline would be
welfare-enhancing. Political economy considerations concerning the incentives or
disincentives of the old SGP were given only minor importance or left out of the discussion.
This is also why their reform proposals do not aim for a major modification of the
institutional setup of the SGP. The preferred option is a change in existing rules and
procedures. Particularly illustrative examples of the third group are Bofinger (2003), Fitoussi
(2002) and Mathieu and Sterdyniak (2003).
-18-