The Stability and Growth Pact: A Delicate Balance or an Albatross?

Abstract

The Stability and Growth Pact of 1997 tried to strike a delicate balance.¹ On the one hand, it imposed the constraints on national fiscal policy that were deemed necessary to protect the new European Central Bank (ECB) from outside pressures, especially during the period in which it tried to establish credibility.² At the same time, the Pact allowed some flexibility for a counter-cyclical fiscal policy. This too was deemed necessary in EMU: a stable ECB policy might be expected to create stable macroeconomic conditions for the Euro-zone as a whole, but it could not be expected to iron out regional cyclical imbalances. Did the Pact strike a workable balance? Or is the Pact an unnecessary albatross that could seriously hamper the whole EMU project?

This paper was prepared for the Austrian National Bank’s Workshop on “Challenges for Economic Policy Coordination within EMU”, January 22nd, 1999. We would like to thank, without implicating, Eduard Hochreiter and other Workshop participants for their helpful comments.