The Impact of the Maastricht Criteria and the Stability Pact on Growth and Unemployment in Europe

This paper attempts to measure the direct effects of the Maastricht criteria and the Stability Pact on growth and unemployment in the EU countries, and covers the period 1980-2001. The evidence from a panel empirical analysis suggests that growth was negatively influenced by the imposition of the Maastricht criteria, showing a fall of 0.5 percentage points on the growth of real output. Estimating the pre- and post-Maastricht periods separately, it was found that the increment of public debt affected both periods equally. However, the negative effects of the public deficit ratio and inflation rate are slightly stronger in the pre-Maastricht period. Nevertheless, the evidence shows that the higher fiscal discipline after Maastricht did not benefit the growth of real output. Exchange rate stability seems to have a negative effect on growth but interest rates did not seem to have any influence on the growth of real output. The unemployment analysis through growth confirms the idea that unemployment follows the economic cycle and that the fall in unemployment due to growth of real GDP was smaller in the post-Maastricht period. Our main conclusion is that the Maastricht criteria and the Stability Pact have been unfavourable to growth and unemployment in Europe, so we argue that a more flexible Stability Pact is now needed to stimulate aggregate demand and encourage productive investment in order to achieve full employment and a higher economic activity