The Stability and Growth Pact: How Much CoOrdination

1
The Stability and Growth Pact How Much
Co-Ordination?

• John Fitz Gerald and Adele Bergin
• The Economic and Social Research Institute
• www.esri.ie

2
Fiscal Policy under EMU

• EMU changed things
• Channels for transmission
• Financial system
• Debt default
• Inflation and Interest rates
• Fiscal Policy Regime SGP its role
• Is it effective in preventing unwise policy?
• Does it respect subsidiarity?

3
Financial Stability

• All have interest in financial stability
• ECB action to handle regional crisis?
• Who would handle a regional crisis?

4
Danger of Default

• Pisani-Ferry If solvency only concern debt
  criterion alone
• What level of debt?
• Investment in Infrastructure
• Different long-term implications
• Produces a return
• Intergenerational equity

5
Investment, share of GDP 2001
6
Public Investment, of GDP
7
Government saving of GDP
8
Dangers of Inflation

• Effect of fiscal policy changed by EMU
• Fiscal Policy Under 3 Regimes
• Independent Monetary Policy
• EMS
• EMU
• Example
• Fiscal Stimulus in Germany 2 of GDP
• Using NiGEM

9
Effect on Interest rates
10
Effect on German GDP
11
Effect on French GDP
12
Under EMU

• Only small negative spillover
• Inflation effect small
• Interest Rate effect small
• True for fiscal stimulus in other members

13
Results

• Under EMU
• Unwise fiscal policy in one regional economy has
  limited scope to damage the Euro area economy.
• Under EMS
• Unwise fiscal policy in Germany could have
  serious negative effects elsewhere
• The SGP is the child of the EMS

14
Domestic Fiscal Policy

• The cost of a fiscal war of attrition?
• Example of Finland
• Would it be different for France Germany?
• Rapid adjustment lower cost?
• Maybe SGP is sensible rule for individual
  countries

15
Conclusions

• Enforce the SGP first?
• Replacement for the SGP
• Should respect subsidiarity
• Protect against real potential dangers Danger
  of default
• Debt criterion or Modified Golden Rule?
  Blanchard and Giavazzi
• How strong a rule?