Reforming the European Stability and Growth Pact: Public Debt is Not the Only Factor, Private Debt Counts as Well

Public debt has increased sharply during the financial and economic crisis. The European stability and growth pact could not have prevented this from happening. It follows that the institutional framework of the European Monetary Union is inadequate. Nonetheless, the current debate about reforming the stability and growth pact is dominated by proposals that endorse the one-sided fixation on public deficits and debt and aim to make sanctions more automatic and severe. Such a strategy would not only pose a threat to the current economic recovery in Europe. It also fails to address the problems facing the euro area. Not only public, but also private debt may ptentially destabilize the monetary union. Without a new focus of the pact the problems of the euro area will not be resolved. In this report, the IMK first critically assesses recent reform pro-posals and then presents its own concept of a revised stability and growth pact. Here the focus is on current account balances that may point to unsustainable developments in both the public and the private sector.