Reforming the Stability and Growth Pact: Breaking the Ice

This paper presents a critical assessment of the Stability and Growth Pact (SGP). Section 2 recalls the fiscal policy framework in the euro area. Section 3 provides an assessment of the first five years of the SGP. Section 4 addresses the weaknesses of the procedures: arbitrary criteria, insufficient economic policy co-ordination. Section 5 discusses European Commission's recent proposals: strengthening its influence on national fiscal policies; considering 'close-to-balance or in surplus' underlying budgetary positions. Section 6 discusses recent academic proposals: budgetary federalism, golden rule, permanent balance rule, public expenditure rule, fiscal policy committees, public debt surveillance... In section 7 we suggest that national budgetary policies should be responsible for managing the inflationproduction trade-off, under a medium term inflation objective, while monetary policy would target interest rates. This policy mix would give better outcomes in terms of economic stabilisation than the existing framework.