The Impact of the Stability and Growth Pact on Real Economic

Paolo Savona and Carlo Viviani ()
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Paolo Savona: Scuola Superiore di Pubblica Amministrazione - Rome, Italy

Public Economics from EconWPA

Abstract: The recession under way in the European Union and the threat of deflation have spawned increasing frequent calls for modification of the Stability and Growth Pact. The present article confirms the negative correlation of the rate of real output growth with that of increase in current public expenditure, but finds a positive correlation of growth with the rate of increase in public capital spending, private investment, tax to GDP ratio, and an indicator of the net profit rate. The policy prescription is for the urgent modification of the rules of the Pact, exempting public investment from its constraints subject to the assessment of the Ecofin Council. The markets would be receptive to such a change if the EU instituted clear new rules, not just reinterpreting those now in being under the pressure of contingent factors. On this basis, we find that Italy's economic crisis is due in part to the misconceived fiscal and monetary policy rules of the European Union.

Keywords: Stability Pact; Fiscal Rules; European Union; Ricardian Equivalence (search for similar items in EconPapers)
JEL-codes: E62 H6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-mac, nep-pbe and nep-pke
Date: 2004-03-18
Note: Type of Document - pdf; pages: 19

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwppe:0403003

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