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Stability and Growth Pact II: Incentives and Moral Hazard

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  • André Fourçans
  • Thierry Warin

Abstract

Adopted in 1997 and implemented in 1999 with the euro, the Stability and Growth Pact (SGP) addresses concerns of budgetary discipline in the Economic and Monetary Union (EMU). After many breaches and the failure of the implementation of fines, Europe amended the SGP on 20 March 2005. In the new institutional design, the preventive element is now tighter, but the dissuasive element is laxer. Using a game theoretical approach emphasizing the notion of moral hazard, we find that the new design does not prevent countries from engaging in moral hazard behaviors and countries will thus be less inclined to abide by the SGP.

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  • André Fourçans & Thierry Warin, 2007. "Stability and Growth Pact II: Incentives and Moral Hazard," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 10(1), pages 51-62.
    • Handle: RePEc:taf:jecprf:v:10:y:2007:i:1:p:51-62
    DOI: 10.1080/17487870701213599
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    References listed on IDEAS

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    1. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "The interaction of fiscal and monetary policy in a monetary union : Balancing credibility and flexibility," Discussion Paper 1995-101, Tilburg University, Center for Economic Research.
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    3. Robert A.J. Dur & Ben D. Peletier & Otto H. Swank, 1997. "The Effect of Fiscal Rules on Public Investment if Budget Deficits are Politically Motivated," Tinbergen Institute Discussion Papers 97-125/1, Tinbergen Institute.
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    Cited by:

    1. Ngai, Victor, 2012. "Stability and Growth Pact and Fiscal Discipline in the Eurozone," Working Papers 12-10, University of Pennsylvania, Wharton School, Weiss Center.

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