Stability and Growth Pact: Too Young to Die, Too Old to Rock ‘n’ Roll

Patroklos Patsoulis (), Marios Psychalis and Georgios A. Deirmentzoglou
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Patroklos Patsoulis: Department of Economics and Business, Neapolis University Pafos, 2 Danais Avenue, Paphos 8042, Cyprus
Marios Psychalis: Department of Economics and Business, Neapolis University Pafos, 2 Danais Avenue, Paphos 8042, Cyprus
Georgios A. Deirmentzoglou: Department of Economics and Business, Neapolis University Pafos, 2 Danais Avenue, Paphos 8042, Cyprus

JRFM, 2022, vol. 15, issue 12, 1-12

Abstract: This paper discusses the future of the Stability and Growth Pact (hereafter SGP). Although Neoclassical economic models argue that strict fiscal and monetary rules minimize moral hazard and crowding out, in practice many governments adopt fiscal expansion (in recent years in the form of non-standard monetary measures) to mitigate market failures, consequently rethinking monetary rules and targets. Government spending and countercyclical policies are essential tools for soothing business cycles and other market failures. To this end, we empirically test whether current and past forms of the SGP have led to greater convergence, while we critically assess and investigate a possible SGP reform. By adopting more flexible rules, in terms of government spending and fiscal expansion, the Economic and Monetary Union (hereafter EMU) could yield multiple positive spillover effects in long-term economic growth under specific terms and conditions, such as green conditionalities. We conclude that to mitigate the triple crisis threat (economic, environmental and health), what is mostly needed are reforms in the form of fiscal federalism, such as common debt issuance (Eurobonds) that enhance the ability of the EMU to tackle the consequences of the aforementioned crises.

Keywords: fiscal expansion; fiscal federalism; EMU fiscal policy; Eurobonds (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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