Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework

Abstract

Although some have essentially written off the Stability and Growth Pact after a number of recent travails, a review of the evidence suggests that it has been a success in numerous European Union countries, especially in terms of guiding them towards underlying balance. These countries tended to be smaller, more volatile, and to rely on a form of fiscal governance that emphasizes fiscal rules and contracts. Since most of the new members share these characteristics, it is important that the external anchor function of the SGP be retained. The recent changes to the Pact—especially those pertaining to the preventive arm, which deals with medium-term fiscal objectives—need to be assessed in this light. Implementation will be key. But enforcement of the SGP is essentially in the soft law domain, which means that countries ultimately need to possess to right incentives to accept its precepts. In this regard, domestic governance reforms that increase the reputational costs for noncompliance are most useful, and primary among these is the establishment of independent fiscal councils that vet policies.