Breaking the stability pact: was it predictable?

Luigi Bonatti () and Annalisa Cristini

No 714, Department of Economics Working Papers from Department of Economics, University of Trento, Italia

Abstract: We show analytically that the credibility problem which has affected the European Stability Pact originates from the insufficient distinction between two reasons for having binding fiscal constraints. The first reason deals with the governments� tendency to neglect the effects of their fiscal policy on foreign governments (fiscal free-riding). The second reason follows from the governments� tendency to raise debt by lowering taxes or increasing expenditures, and then to leave it to their successors (fiscal short-termism). An enforcement mechanism relying on governments� collusion works if the fiscal constraints are not calibrated for curing fiscal short-termism but only for preventing fiscal free-riding.

Keywords: Fiscal policy; Policy coordination; Capital formation; Free-riding; Short-termism. (search for similar items in EconPapers)
JEL-codes: E6 H3 H7 O4 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
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Citations: View citations in EconPapers (2)

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Journal Article: Breaking the Stability Pact: Was it predictable? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:trn:utwpde:0714

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