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The Stability and Growth Pact: Lessons from the Great Recession

Author(s): Martin Larch - Directorate General for Economic and Financial Affairs (European Commission), Paul van den Noord - Organisation for Economic Co-operation and Development (OECD), Lars Jonung - Lund University, Swedish Fiscal Policy Council

The Stability and Growth Pact: Lessons from the Great Recessionpdf(759 kB) Choose translations of the previous link 

Summary for non-specialistspdf(95 kB) Choose translations of the previous link 

While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.

(European Economy. Economic Papers 429. December 2010. Brussels. PDF. 54pp. Tab. Graph. Bibliogr. Free.)

KC-AI-10-429-EN-N (online)
ISBN 978-92-79-14915-3-4 (online)
ISSN 1725-3195 (online)
doi: 10.2765/44911 (online)

JEL classification: E62, E63, H6

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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