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



101 PROPOSALS TO REFORM THE STABILITY AND GROWTH

PACT. WHY SO MANY? A SURVEY

Jonas Fischer, Lars Jonung and Martin Larch

December 5, 2006

Abstract:

The failure of key EU Member States to respect the requirements of the Stability and Growth
Pact (SGP) a few years after its inception triggered a heated debate on how to reform the
framework of fiscal policy coordination in the Economic and Monetary Union (EMU). This
paper systematically 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 was completely new. 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 different economic assessments.

Key words: Monetary union, euro, fiscal policy, Stability and Growth Pact, international
policy coordination, EMU, European Union, Europe.

JEL classification: E32, E62, E63, C23, H30

Please note: The views expressed here are those of the authors. They do not represent the
views of DG ECFIN.

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