Does Rational Economic Policy Require a Stability and Growth Pact?

Abstract:

The Stability and Growth Pact which has been suspended since the beginning of the COVID-19 pandemic has a number of major deficiencies: it acts pro-cyclically, it has a mainly defensive character to avoid negative spill-overs from “profligate” countries and its direction to individual countries makes the formulation of a policy stance for the euro area as a whole very difficult.

However, coordination of member states’ policies is necessary, also in order to arrive at an “optimal” macroeconomic policy mix in line with the European Central Bank.

An expenditure rule would fulfil this requirement, taking account of the priority to invest into the future (green objectives, digitalisation, employment objectives).  Contrary to the present set-up, such a rule would be enforced by peer pressure, popular discussion and pressure from financial markets. A separate rule would apply to the debt burden incurred by fighting the COVID-19 pandemic.

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