THE STABILITY AND GROWTH PACT: CRISIS AND REFORM

• Published in: Ifo DICE report Vol. 9; no. 3; p. 10
• Main Authors: Schuknecht, Ludger, Moutot, Philippe, Rother, Philipp, Stark, Jürgen
• Format: Journal Article
• Language: English
• Published: Munich Ifo Institute 01.10.2011
• Subjects: Budget deficits; Coordination; Economic development; European Monetary Union; Eurozone; Expenditures; Fiscal policy; GDP; Gross Domestic Product; Public finance; Reforms; Sovereign debt; Studies; Surveillance; Europe
• ISSN: 2511-7815

The sovereign debt crisis in the euro area is a symptom of policy failures and deficiencies in fiscal policy coordination. It reflects the as yet unresolved challenge of how to place public finances on a sufficiently sound fooling in the European Monetary Union (EMU). This challenge has been compounded by spillovers from the financial and economic crisis to public finances. The greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU itself. This paper looks at the history of fiscal policy and rules in EMU before concluding with proposals in the area of fiscal governance that the authors consider essential for effective policy coordination in the future. Many observers and economists warned against establishing EMU without adequate fiscal controls.