Revisiting EMU's Stability Pact: A Pragmatic Way Forward

The Stability and Growth Pact is under fire. Some countries are meeting major problems in sticking to the rules. Proposals to reform the Pact or ditch it altogether abound. The alleged weaknesses of the Pact tend to reflect trade-offs typical of supra-national arrangements. This aspect has to be factored in when considering reforms of the current fiscal rules: there is no miracle solution. EMU without rules would be an interesting experiment, but a risky policy option. Given the existing degree of political integration in EMU, internal adjustment rather than attempting to redesign the rules from scratch appears a more suitable way forward. Redefining the medium-term budgetary target, improving transparency, tackling the pro-cyclical fiscal bias in good times, moving towards non-partisan application of the rules, and improving transparency in the data can achieve both stronger discipline and higher flexibility. Copyright 2003, Oxford University Press.