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Ec4024 Lecture13: The Stability and Growth Pact: Time to Break the Rules?


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The Stability and Growth Pact is too restrictive to allow Ireland to get out of the current economic difficulties it finds itself in. I argue we should break those rules, with a grin, for a few years.

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Ec4024 Lecture13: The Stability and Growth Pact: Time to Break the Rules?

  2. 2. LAST TIME Domestic & International Money Markets
  3. 3. THIS TIME S&G Pact: what it is how it works We should think about changing it
  4. 4. 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 GDP 3. ...and more
  5. 5. 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
  6. 6. Ireland’s Budget Deficit as a % of GDP 2.5 0 -2.5 -5.0 -7.5 -10.0 2007 2008 2009 2010 2011 2012 2013 General Govt. Revenue-General Govt expenditure, %GDP EU: Public Finances in EMU, 2008:222
  7. 7. 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
  8. 8. 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
  9. 9. 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’
  10. 10. 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
  11. 11. NEXT TIME Default Probabilities and Defunct States: Ireland and Iceland