Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2011:6: The Stability and Growth Pact: Lessons from the Great Recession

Martin Larch (), Paul van den Noord () and Lars Jonung ()
Additional contact information
Martin Larch: Directorate General for Economic and Financial Affairs, European Commission, Postal: European Commission, Directorate General for Economic and Financial Affairs, Unit R 4, B-1049 Brussels, Belgium,
Paul van den Noord: Organisation for Economic Co-operation and Development (OECD), Postal: OECD , 2 Rue André-Pascal , 75775 Paris Cedex 16 , France
Lars Jonung: School of Economics and Management, Postal: School of Economics and Management, Lund University, Box 7080, S-220 07 Lund, Sweden

Abstract: While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.

Keywords: Stability and Growth Pact; EU; Europe; the euro; Great Recession; fiscal sovereignty

JEL-codes: E62; E63; H60

52 pages, January 27, 2011

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