THE STABILITY & GROWTH PACT: TIME TO BREAK THE RULES?

Dr Stephen Kinsella | stephen.kinsella@ul.ie |stephenkinsella.net

LAST TIMEDomestic & International Money Markets

THIS TIME

S&G Pact: what it ishow it worksWe should think about changing it

WHAT IS THE SGP?

Articles 99 & 104 of EC/Maastricht Treaties

Carrots & Sticks for implementation of fiscal discipline

Maastricht Criteria:1. Budget Deficit < 3% of GDP p.a.2. National Debt < 60% of GDP3. ...and more

HOW DOES IT WORK?

Directorate-General for Economic and Financial Affairs monitors EU countries’ budgets

Apply Maastricht criteria

If Pass, then OK

If Fail, then not OK-> Excessive Deficit Procedure & Sanctions

-10.0

-7.5

-5.0

-2.5

0

2.5

2007 2008 2009 2010 2011 2012 2013

Ireland’s Budget Deficit as a % of GDP

General Govt. Revenue-General Govt expenditure, %GDP

EU: Public Finances in EMU, 2008:222

EXCESSIVE DEFICIT PROCEDURES

Applied over 7 countries in 2007

Applied to Ireland in Feb this year.

Why?

Ireland’s deficit at 6.3%+

Ireland’s debt:GDP ratio will increase above 60% in 2010

PRIORITIES OF SGP

Medium term budgetary position of ‘close to surplus’

Sustainability of ‘Quality’ Public Finances

Achieve low core inflation through fiscal prudence

‘Normal’ vs ‘Exceptional’ economic conditions

PROBLEMS WITH SGP

Rules applied over 1 year, not over a Business Cycle (YET).

Rules inconsistently applied (Portugal vs. France)

Definition of ‘close’, ‘temporary’, and ‘exceptional’

TIME TO BREAK THE RULES WITH A GRIN?

Rules constrain Irish fiscal policy greatly

stop us entering into any kind of expansionary policy

Not good in this situation, see Cournot paper.

Why? Monetary Policy can’t support Fiscal Policy in Ireland

NEXT TIME

Default Probabilities and Defunct States: Ireland and Iceland