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The mixed success of the Stability and Growth Pact

Jasper De Jong, Niels Gilbert, (2019), “The mixed success of the Stability and Growth Pact”, VoxEU.org, 15 January

The corrective arm of the SGP has both been ridiculed by those highlighting that despite non-compliance sanctions have never been imposed, and vilified by those blaming it for having caused procyclical fiscal tightening. This column suggests there is probably more truth to the latter than the former criticism. While we find indications that forecasted compliance is a bit stronger than actual compliance – in line with the literature on forecast biases in the proximity of the 3% threshold (Frankel and Schreger 2013, Gilbert and De Jong 2017) – Excessive Deficit Procedure recommendations significantly affect fiscal policy in the euro area.

In interpreting these findings, some nuance remains warranted. After all, even absent any Excessive Deficit Procedure recommendation, most governments would – at least to some extent – eventually correct large deficits. As such, the effect of Excessive Deficit Procedure recommendations may partly reflect a forward shift of fiscal adjustment rather than an additional effect.

As a final remark, note that the procyclical effects of the Excessive Deficit Procedure partly reflect the failings of the preventive arm, which has contributed to a lack of buffer creation in good times. A number of recent proposals effectively aim to make the preventive arm look more like the corrective arm, in terms of clarity and possibility for sanctions, or merge the two altogether (e.g. European Fiscal Board 2018, Bénassy-Quéré et al. 2018). Our findings on the – perhaps surprising – effectiveness of the corrective arm suggest that this could be a fruitful way forward.

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