Theory, Evidence and Institutions
11. 1. Reforming EMU’s ﬁscal rules* INTRODUCTION As recalled through this book, the Stability and Growth Pact (SGP) is one of the pillars of EMU. It is a discipline device aiming at ensuring sound budgetary balances and low public debts. While widely regarded as a major innovation (Artis, 2002), the Pact has been the subject of heated controversy ever since its inception. It has been extensively criticized by academics and opinion makers. Proposals for radical changes have been put forward and even the suppression of the Pact has been considered. This debate accelerated in 2002 under the inﬂuence of public ﬁnance developments in a number of euro area countries which called into question its eﬀectiveness and wisdom. In a way, these policy problems and debates are related to the success of EMU rules in curbing deﬁcits. When the public ﬁnances in a number of EU countries appeared to be on an unsustainable path, the beneﬁts of lower deﬁcits were evident. Fiscal discipline was recognized as a pre-condition to lower interest rates and to use ﬁscal policy for cyclical stabilization (Chapter 2). The arbitrary nature of the 3 per cent deﬁcit limit appeared acceptable in view of the need to enforce ﬁscal discipline. Now that deﬁcits have been lowered, the issue of the proper balance between ﬁscal discipline and other targets has come to the fore. Our analysis and proposals take as given the current preferences for political integration. This implies that ﬁscal policies...
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