Between Growth and Stability
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Between Growth and Stability

The Demise and Reform of the European Union’s Stability and Growth Pact

Edited by Lelia Simona Talani and Bernard Casey

Combining economic and political science perspectives, this timely and important book describes and analyses the circumstances and events leading to the demise and subsequent reform of the Stability and Growth Pact (SGP).
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Chapter 5: Notes on the Reformed SGP: Creating and Implementing Effective Macroeconomic Frameworks

Robert Woods


5. Notes on the reformed SGP: creating and implementing effective macroeconomic frameworks Robert Woods1 1 INTRODUCTION This chapter sets out some general principles for an effective macroeconomic framework and looks at the Stability and Growth Pact (SGP)2 in this context. It goes on to consider how the recent reforms3 are likely to affect the functioning of the SGP. The final section considers some of the future challenges in the implementation of the reformed SGP. Effective macroeconomic policy frameworks help to achieve high and stable levels of economic growth and employment. Section 2 considers some general principles for effective policy frameworks characterized in terms of credibility, flexibility and legitimacy. Experience has pointed countries to frameworks with ‘constrained discretion’ with: clear longterm goals; a pre-commitment to sound institutional arrangements; and maximum transparency. Section 3 discusses how the SGP performed against the three criteria of credibility, flexibility and legitimacy in the past and the extent to which the recent reforms have improved operation of the SGP. In particular, it highlights how key areas of the reforms are aimed at: ● ● ● improving credibility, for example by the increased focus on debt levels and long-term fiscal sustainability; increasing flexibility by giving greater attention to cyclical factors and the quality of public spending, including public investment; and enhancing legitimacy from a more robust economic rationale and greater scope for judgement in the application of the SGP. Finally, Section 4 discusses some future challenges in implementing the pact including: the development of...

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