Advertisement

The Stability and Growth Pact and the New “Flexibility” Rules

  • Joaquim Miranda Sarmento
Chapter
First Online:
Part of the Financial and Monetary Policy Studies book series (FMPS, volume 47)

Abstract

The euro currency imposes three conditions: price stability, fiscal sustainability, and exchange rate stability. The Stability and Growth Pact (SGP) has created two budgetary limits: 3% of GDP for deficit and 60% for public debt. If a country violates these limits, sanctions can be applied. However, there are two exceptions: economic recession or temporary excessive deficit resulting from extraordinary events. After the 2005 reform (and reinforced by the Fiscal Treaty), the Medium-Term Objective (MTO) was created (usually for a structural deficit of 0.5% of GDP). Recently, there has also been a “relaxation” of the SGP’s rules and targets for contributions to the “Juncker Investment Plan”, and in those countries with a budget deficit below 3%, there has also been a change concerning how the SGP deficit limit of 3% is accounted for, as well as the funding of cofinanced projects, structural reforms, and the cyclic component.

This is a preview of subscription content, log in to check access.

References

  1. Afonso A (2001) Non-Keynesian effects of fiscal policy in the EU-15. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=317481. Accessed 1 July 2017
  2. Afonso A (2010) Expansionary fiscal consolidations in Europe: new evidence. Appl Econ Lett 17:105–109CrossRefGoogle Scholar
  3. Ahrend R, Catte A, Price R (2006) Interactions between monetary and fiscal policy: how monetary conditions affect fiscal consolidation. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1010655. Accessed 31 July 2018
  4. Alesina A, Ardagna S (2010) Large changes in fiscal policy: taxes versus spending. In: Tax policy and the economy, vol 24. The University of Chicago Press, Chicago, IL, pp 35–68CrossRefGoogle Scholar
  5. Alesina A, Ardagna S (2013) The design of fiscal adjustments. In: Tax policy and the economy, vol 27. The University of Chicago Press, Chicago, IL, pp 19–67CrossRefGoogle Scholar
  6. Alesina A, Perotti R (1996) Fiscal adjustments in OECD countries: composition and macroeconomic effects (No. w5730). National Bureau of Economic ResearchGoogle Scholar
  7. Alesina A, Favero C, Giavazzi F (2012) The output effect of fiscal consolidations (No. w18336). National Bureau of Economic ResearchGoogle Scholar
  8. Alesina A, Favero C, Giavazzi F (2015) The output effect of fiscal consolidation plans. J Int Econ 96:S19–S42CrossRefGoogle Scholar
  9. Amtenbrink F, de Haan J (2006) Reforming the Stability and Growth Pact. EL Rev 31:402–413Google Scholar
  10. Auerbach A, Obstfeld M (2004) Monetary and fiscal remedies for deflation. Am Econ Rev 94:71–75CrossRefGoogle Scholar
  11. Auld D (1971) Automatic fiscal stabilizers: problems of identification and measurement. Finances Publiques 26:513–531Google Scholar
  12. Barnes S, Davidsson D, Rawdanowicz Ł (2012) Europe’s new fiscal rules. https://www.oecd-ilibrary.org/economics/europe-s-new-fiscal-rules_5k9777md976b-en. Accessed 1 Feb 2016.
  13. Barro R (1974) Are government bonds net wealth? J Polit Econ 82:1095–1117CrossRefGoogle Scholar
  14. Barro RJ (1989) The Ricardian approach to budget deficits. J Econ Perspect 3(2):37–54CrossRefGoogle Scholar
  15. Barro RJ, Redlick CJ (2009) Macroeconomic effects from government purchases and taxes. National Bureau of Economic Research – Working paper series, September 2009Google Scholar
  16. Benes J, Clinton K, Garcia-Saltos R, et al (2010) Estimating potential output with a multivariate filter. IMF Working Paper WP/10/285. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1751398. Accessed 1 Feb 2016
  17. Benes J, Kumhof M, Laxton D (2014) Financial crises in DSGE models: selected applications of MAPMOD. Working Paper 14/56. International Monetary Fund, Washington, DCCrossRefGoogle Scholar
  18. Benhabib J, Schmitt-Grohé S, Uribe M (2001) Monetary policy and multiple equilibria. Am Econ Rev 91:167–186CrossRefGoogle Scholar
  19. Bernanke B, Mihov I (1995) Measuring monetary policy (No. w5145). National Bureau of Economic ResearchGoogle Scholar
  20. Bernanke B, Vincent R, Reinhart C (2004) Conducting monetary policy at very low short-term interest rates. Am Econ Rev 94:85–90CrossRefGoogle Scholar
  21. Blanchard O (2006) Macroeconomics. Pearson Prentice Hall, New YorkGoogle Scholar
  22. Blanchard O, Dell’Ariccia G, Mauro P (2010) Rethinking macroeconomic policy. J Money Credit Bank 42:199–215CrossRefGoogle Scholar
  23. Blinder AS (2000) Central-bank credibility: why do we care? How do we build it? Am Econ Rev 90(5):1421–1431CrossRefGoogle Scholar
  24. Blinder A (2010) How central should the central bank be? J Econ Lit 48:123–133CrossRefGoogle Scholar
  25. Buchanan J (1976) Barro on the Ricardian equivalence theorem. J Polit Econ 84:337–342CrossRefGoogle Scholar
  26. Buti M, Sapir A (eds) (1998) Economic policy in EMU: a study. Oxford University Press, OxfordGoogle Scholar
  27. Buti M, Franco D, Ongena H (1998) Fiscal discipline and flexibility in EMU: the implementation of the Stability and Growth Pact. Oxf Rev Econ Policy 14:81–97CrossRefGoogle Scholar
  28. Buti M, Eijffinger S, Franco D (2003) Revisiting the Stability and Growth Pact: grand design or internal adjustment? European Economy Economics Papers, No. 180. European Commission, Brussels. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=374461. Accessed 1 Feb 2016
  29. Buti M, Eijffinger SC, Franco D (2005) The stability Pact pains: a forward-looking assessment of the reform debateGoogle Scholar
  30. Buti M (2007) Will the new Stability and Growth Pact succeed? An economic and political perspective. In: The Stability and Growth Pact experiences and future aspects. Springer, Vienna, pp 155–181CrossRefGoogle Scholar
  31. Chalk M, Hemming M (2000) Assessing fiscal sustainability in theory and practice (No. 0-81). International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/2000/wp0081.pdf. Accessed 1 June 2016CrossRefGoogle Scholar
  32. Coenen G, Mohr M, Straub R (2008) Fiscal consolidation in the Euro area: long-run benefits and short-run costs. Econ Model 25:912–932CrossRefGoogle Scholar
  33. Cogley T, Nason J (1995) Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research. J Econ Dyn Control 19:253–278CrossRefGoogle Scholar
  34. Congdon T (2008) Two concepts of the output gap. World Econ 9:147Google Scholar
  35. Crespo J, Reitschuler G, Silgoner M (2011) On the effectiveness and limits of fiscal stabilizers. Appl Econ 43:1079–1086CrossRefGoogle Scholar
  36. D’Auria F, Havik K, Mc Morrow K, et al (2010) The production function methodology for calculating potential growth rates and output gaps (No. 420). Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission. http://ec.europa.eu/economy_finance/publications/economic_paper/2014/pdf/ecp535_en.pdf. Accessed 1 Apr 2015
  37. Darby J, Melitz J, Masten I (2008) Social spending and automatic stabilizers in the OECD [with Discussion]. Econ Policy 23:716–756CrossRefGoogle Scholar
  38. De Haan J, Mink M (2005) Has the Stability and Growth Pact impeded political budget cycles in the European Union? https://papers.ssrn.com/sol3/papers.cfm?abstract_id=812329. Accessed 1 June 2017
  39. De Haan J, Helge B, Jansen D (2004) Why did the Stability and Growth Pact fail? Int Finance 7:235–260CrossRefGoogle Scholar
  40. Dreger C, Artís M, Moreno R, et al (2007) Study on the feasibility of a tool to measure the macroeconomic impact of structural reforms. Comissão Europeia, European Economy, Economic Papers, No. 272, JanGoogle Scholar
  41. Dworak M, Wirl F, Prskawetz A et al (2002) Optimal long-run budgetary policies subject to the Maastricht criteria or a stability pact. Macroecon Dyn 6:665–686CrossRefGoogle Scholar
  42. Ehlgen J (1998) Distortionary effects of the optimal Hodrick–Prescott filter. Econ Lett 61:345–349CrossRefGoogle Scholar
  43. Eichengreen B, Wyplosz C (1998) The Stability Pact: more than a minor nuisance? Econ Policy 13:66–113CrossRefGoogle Scholar
  44. Eijffinger S, De Haan J (2000) European monetary and fiscal policy (No. a056022b-c6b1-4c89-bcd5-309377a399aa). School of Economics and Management, Tilburg UniversityGoogle Scholar
  45. European Commission (2006a) The impact of ageing on public expenditure: projections for the EU-25 Member States on pensions, healthcare, long-term care, education and unemployment transfers (2004-50). Office for Official Publications of the European CommunitiesGoogle Scholar
  46. European Commission (2006b) Commonly agreed methodology for the estimation of potential output and CABs. European Economy Economic Papers, No. 247, MarGoogle Scholar
  47. European Commission (2014a) New estimations of the Phillips curves and structural unemployment in the Euro area. Quarterly report on the euro area, vol 13(1), AprGoogle Scholar
  48. European Commission (2014b) The EU’s economic governance explained. Brussels, May 28Google Scholar
  49. European Commission (2017) SGP Vade mecum. https://ec.europa.eu/info/sites/info/files/ip052_en_0.pdf. Accessed 1 Apr 2017
  50. European Commission (2015) Making the best use of the flexibility within the existing rules of the Stability and Growth Pact. COMGoogle Scholar
  51. Eurostat (2016) Manual of government deficit and debt. https://ec.europa.eu/eurostat/documents/3859598/7203647/KS-GQ-16-001-EN-N.pdf/5cfae6dd-29d8-4487-80ac-37f76cd1f012. Accessed 1 Nov 2016
  52. Fischer S, Sahay R, Végh C (2002) Modern hyper-and high inflations. J Econ Lit 40:837–880CrossRefGoogle Scholar
  53. Fleischman C, Roberts J (2011) From many series, one cycle: improved estimates of the business cycle from a multivariate unobserved components model. Finance and Economics Discussion Series 2011-46, Federal Reserve BoardGoogle Scholar
  54. Gali J (2011) The return of the wage Phillips curve. J Eur Econ Assoc 9:436–461CrossRefGoogle Scholar
  55. Girouard N (2005) Measuring cyclically adjusted budget balances for OECD countries (No. 434). OECD Working PapersGoogle Scholar
  56. Goodfriend M (2007) How the world achieved consensus on monetary policy. J Econ Perspect 21:47–68CrossRefGoogle Scholar
  57. Goodhart C (2011) The changing role of central banks. Financ Hist Rev 18:135–154CrossRefGoogle Scholar
  58. Gordon R (1982) Why stopping inflation may be costly: evidence from fourteen historical episodes. In: Hall R (ed) Inflation: causes and effects. University of Chicago Press, Chicago, IL, pp 11–40Google Scholar
  59. Guichard S, Kennedy M, Wurzel E, et al (2007) What promotes fiscal consolidation. https://www.oecd-ilibrary.org/content/paper/180833424370. Accessed 1 June 2017
  60. Heipertz M, Verdun A (2004) The dog that would never bite? What we can learn from the origins of the Stability and Growth Pact. J Eur Public Policy 11:765–780CrossRefGoogle Scholar
  61. Hernández de Cos P, Moral‐Benito E (2013) Fiscal consolidations and economic growth. Fisc Stud 34:491–515CrossRefGoogle Scholar
  62. Hetzel R (2000) The Taylor rule: is it a useful guide to understanding monetary policy? Fed Reserve Bank Richmond Econ Q 86:1–33Google Scholar
  63. Heylen F, Everaert G (2000) Success and failure of fiscal consolidation in the OECD: a multivariate analysis. Public Choice 105:103–124CrossRefGoogle Scholar
  64. Hodrick R, Prescott E (1997) Postwar US business cycles: an empirical investigation. J Money Credit Bank 29:1–16CrossRefGoogle Scholar
  65. IMF (2015) A new methodology for estimating the output gap in the United States. WP15/144. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/A-New-Methodology-for-Estimating-the-Output-Gap-in-the-United-States-43040. Accessed 1 June 2017
  66. Issing O, Gaspar V, Angeloni I et al (eds) (2001) Monetary policy in the euro area: strategy and decision-making at the European Central Bank. Cambridge University Press, CambridgeGoogle Scholar
  67. Jensen H (2002) Targeting nominal income growth or inflation? Am Econ Rev 92:928–956CrossRefGoogle Scholar
  68. Judd J, Rudebusch G (1998) Taylor’s rule and the Fed: 1970–1997. Fed Reserve Bank San Francisco Econ Rev 3:3–16Google Scholar
  69. Koske I, Pain N (2008) The usefulness of output gaps for policy analysis. OECD Econ. https://www.oecd-ilibrary.org/economics/the-usefulness-of-output-gaps-for-policy-analysis_241172520210. Accessed 1 Apr 2016
  70. Kozicki S (1999) How useful are Taylor rules for monetary policy? Fed Reserve Bank Kansas City Econ Rev 2:5–33Google Scholar
  71. Kuttner K (1994) Estimating potential output as a latent variable. J Bus Econ Stat 12:361–368Google Scholar
  72. Langenus G (2006) Fiscal sustainability indicators and policy design in the face of aging. National Bank of Belgium, Working Paper (102)Google Scholar
  73. Laxton D, Tetlow R (1992) A simple multivariate filter for the measurement of potential output. Technical Report no. 59. Bank of Canada, OttawaGoogle Scholar
  74. Lucas R (1986) Principles of fiscal and monetary policy. J Monet Econ 17:117–134CrossRefGoogle Scholar
  75. Lucas RE Jr (1980) Rules, discretion, and the role of the economic advisor. In: Rational expectations and economic policy. University of Chicago Press, Chicago, IL, pp 199–210Google Scholar
  76. Lucas R, Sargent T (1981) After Keynesian macroeconomics. Ration Expect Econ Pract 1:295–319Google Scholar
  77. Mackiewicz M (2007) Making the stability pact more flexible: does it lead to pro‐cyclical fiscal policies? Fisc Stud 28:251–268CrossRefGoogle Scholar
  78. Marinheiro C (2001) Ricardian equivalence: an empirical application to the Portuguese economy. Catholic University of Leuven, CES Discussion Paper Series (01.12)Google Scholar
  79. Marinheiro C (2008) Ricardian equivalence, twin deficits, and the Feldstein–Horioka puzzle in Egypt. J Policy Model 30:1041–1056CrossRefGoogle Scholar
  80. Mishkin F, Bank R (2011) How should central banks respond to asset-price bubbles? The ‘lean’ versus ‘clean’ debate after the GFC. https://www.rba.gov.au/publications/bulletin/2011/jun/pdf/bu-0611-8.pdf. Accessed 1 Apr 2016
  81. Morris R, Schuknecht L (2007) Structural balances and revenue windfalls: the role of asset prices revisited. ECB Working Paper 737. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp737.pdf. Accessed 1 June 2016
  82. Morris R, Rodrigues C, Castro F et al (2009) Explaining government revenue windfalls and shortfalls: an analysis for selected EU countries. ECB Working Paper 1114. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1114.pdf?43110bebeebadd20ba1439e3420cffb7. Accessed 1 June 2017
  83. Mundell R (1961) A theory of optimum currency areas. Am Econ Rev 51:657–665Google Scholar
  84. Mundell R (1963) Capital mobility and stabilization policy under fixed and flexible exchange rates. Can J Econ Polit Sci/Revue canadienne de economiques et science politique 29:475–485CrossRefGoogle Scholar
  85. Musgrave R (1959) The theory of public finance: a study in public economy. McGraw-Hill, New YorkGoogle Scholar
  86. Musgrave R (1985) A brief history of fiscal doctrine. In: Auerbach A, Feldstein M (eds) Handbook of public economics. Elsevier, London, pp 1–59Google Scholar
  87. Musgrave PB (1989) Fiscal coordination and competition in an international setting. Department of Economics, University of California, Santa Cruz, CAGoogle Scholar
  88. Musgrave R (1997) Reconsidering the fiscal role of government. Am Econ Rev 87:156–159Google Scholar
  89. Okun A (1962) Potential GNP, its measurement and significance. Cowles Foundation, Yale University. http://cowles.econ.yale.edu/P/cp/p01b/p0190.pdf. Accessed 1 June 2015
  90. Perotti R (1996) Fiscal consolidation in Europe: composition matters. Am Econ Rev 86:105–110Google Scholar
  91. Perotti R (1999) Fiscal policy in good times and bad. Q J Econ 114:1399–1436CrossRefGoogle Scholar
  92. Phelps E (1973) Inflation in the theory of public finance. Swed J Econ 75:67–82CrossRefGoogle Scholar
  93. Ramey V (2011) Can government purchases stimulate the economy? J Econ Lit 49:673–685CrossRefGoogle Scholar
  94. Ravn M, Uhlig H (2002) On adjusting the Hodrick-Prescott filter for the frequency of observations. Rev Econ Stat 84:371–376CrossRefGoogle Scholar
  95. Robinson M (1998) Measuring compliance with the golden rule. Fisc Stud 19:447–462CrossRefGoogle Scholar
  96. Rogoff K (1990) Equilibrium political budget cycles. Am Econ Rev 80:21–36Google Scholar
  97. Rogoff K, Sibert S (1988) Elections and macroeconomic policy cycles. Rev Econ Stud 55:1–16CrossRefGoogle Scholar
  98. Romer C, Romer D (1989) Does monetary policy matter? A new test in the spirit of Friedman and Schwartz. In: NBER Macroeconomics Annual 1989, vol 4. MIT Press, The University of Chicago, Chicago, pp 121–184CrossRefGoogle Scholar
  99. Schick A (2009) Budgeting for fiscal space. OECD J Budg 9:1–18Google Scholar
  100. Schuknecht L (2000) Fiscal policy cycles and public expenditures in developing countries. Public Choice 102:115–130CrossRefGoogle Scholar
  101. Schuknecht L (2004) EU fiscal rules: issues and lessons from political economy. ECB Working Paper, No 421. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp421.pdf?3685220511f6833aee22128b45a7333a. Accessed 1 June 2015
  102. Schuknecht L (2005) Stability and Growth Pact: issues and lessons from political economy. IEEP 2:65–89CrossRefGoogle Scholar
  103. Schuknecht L, Moutot P, Rother P et al (2011) The Stability and Growth Pact: crisis and reform. ECB Occasional Paper (129). https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp129.pdf. Accessed 1 June 2015
  104. Svensson L (1997) Inflation forecast targeting: implementing and monitoring inflation targets. Eur Econ Rev 41:1111–1146CrossRefGoogle Scholar
  105. Svensson L (1999a) Inflation targeting as a monetary policy rule. J Monet Econ 43:607–654CrossRefGoogle Scholar
  106. Svensson L (1999b) Monetary policy issues for the eurosystem. Carn-Roch Conf Ser Public Policy 51:79–136CrossRefGoogle Scholar
  107. Svensson L (2000) The first year of the eurosystem: inflation targeting or not? Am Econ Rev 90:95–99CrossRefGoogle Scholar
  108. Taylor J (1993) Discretion versus policy rules in practice. Carn-Roch Conf Ser Public Policy 39:195–214CrossRefGoogle Scholar
  109. Taylor J (2000) Teaching modern macroeconomics at the principles level. Am Econ Rev 90:90–94CrossRefGoogle Scholar
  110. Van den Noord P (2000) The size and role of automatic fiscal stabilizers in the 1990s and beyond. https://econpapers.repec.org/paper/oececoaaa/230-en.htm. Accessed 1 June 2015
  111. Van der Ploeg F, Venables A (2011) Harnessing windfall revenues: optimal policies for resource‐rich developing economies. Econ J 121:1–30CrossRefGoogle Scholar
  112. Von Hagen J, Hallett A, Strauch R (2002) Budgetary consolidation in Europe: quality, economic conditions, and persistence. J Jpn Int Econ 16:512–535CrossRefGoogle Scholar
  113. Weber C (1995) Cyclical output, cyclical unemployment, and Okun’s coefficient: a new approach. J Appl Econ 10:433–445CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2018

Authors and Affiliations

  • Joaquim Miranda Sarmento
    • 1
  1. 1.ISEG Lisbon School of Economics and ManagementUniversity of LisbonLisbonPortugal

Personalised recommendations

Cite chapter

Buy options