101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey

other fiscal measures simply do not exist today. This has contributed to the demise in the
belief of discretionary fiscal policy as an effective stabilization tool, while the workings of
automatic stabilizers have simultaneously been assigned a more prominent role.²¹

Hardly any of the 101 proposals discusses this fact - except those that suggest that fiscal
policy should be reined in. Most likely, the same mechanism is at work here as in our
discussion of the lack of a common theory for fiscal policy. As there is no common view on
the empirical effects of fiscal policy, this issue is overlooked, allowing for a multitude of
proposals.

5. A new economic landscape: Another factor behind the many proposals is that the
institutional framework for the SGP is completely new for macroeconomists and policy-
makers alike. The euro area is the first case in history of a monetary union where monetary
policy-making is centralized to one multinational central bank, the ECB, while fiscal policy-
making is decentralized to national governments.²² Economists are thus venturing into virgin
territory, which allows them to hold widely divergent views about the proper map to use for
navigation.

Concerning this emerging institutional setting, there is no consensus about the proper theory
and thus the proper models to use to analyze the spillovers or externalities of domestic fiscal
policy. Different models emphasize different channels for international policy dependence,
thus giving rise to different reform proposals concerning policy coordination under EMU.²³
Where a policy proposal is based on a spillover channel working through debt build-up, the
proposal will tend to focus on measures to restrict debt. Where a model for demand-side
spillovers is adopted, the policy recommendations will likely focus on deficit rules. Likewise,
for a model of supply-side dependency, the policy reform suggested would stress steps to
influence the quality of public finance.²⁴

²⁰ See for example Auerbach (1994), Briotti (2005), De Mello et al. (2004) and Hemming et al. (2002).

²¹ See for example Brunila et al. (2003), Orphanides (2000), Orphanides and Williams (2005) and Silgoner et al.
(2003) on the effects of stabilization policies.

²² See the surveys of monetary unions in Bordo and Jonung (2003).

²³ See for example Ardy et al. (2006, chapter 4) for a survey of the issues of policy coordination in the EMU.

²⁴ This point is developed in detail in chapter 4 in Hodson (2006).

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