The Stability Pact: more than a minor nuisance?

Summary Stability Pact More than a minor nuisance?The Stability and Growth Pact will lead member countries to aim for cyclically balanced budgets. Until this steady state is reached, Europe will continue its efforts at de.cit cutting. While so doing, politicians are less likely to undertake the dif.cult labour market reforms that are really needed. Is further .scal retrenchment wise? The paper reviews the reasons that have been advanced in favour of a Stability Pact and .nds them wanting. The most serious justi.cations, such as the systemic risk of bank crisis following a government.s failure to service its debt, can be better dealt with in other ways: for example, by prudential limits on banks. exposure to public debts. Moreover, our analysis reveals that the macroeconomic costs of the Stability Pact, while sizeable, are not as dangerous as often believed. The costs will be barely visible once the steady state is reached. The true macroeconomic costs are front loaded; they concern the next few years, after a decade already dominated by convergence efforts.— Barry Eichengreen and Charles Wyplosz