Deficit Policy within the Framework of the Stability and Growth Pact: An Empirical Analysis

Nicolas Afflatet

Applied Economics and Finance, 2017, vol. 4, issue 2, 76-86

Abstract: It has become common to criticize Germany and France for having broken the Stability and Growth Pact in 2003, supposedly giving way for higher deficits thereafter. However, this question has not yet been answered by the economic literature. It is closely related to the issue whether the Stability and Growth Pact had any disciplining effect on European Monetary Union member countries or not. This article examines the question whether joining the European Monetary Union or the breach of the Stability and Growth Pact in 2003 had an impact on deficits of member states. The empirical analysis shows no evidence for higher deficits after having joined the Eurozone or after having breached the Pact in 2003. These results are robust to different testing methods and when using different data samples. They can be explained with the fact that the Pact was undermined from its beginning and only had a limited disciplining effect henceforth. Otherwise the breakout of the ongoing debt crisis would hardly have been possible.

Keywords: stability and growth pact; fiscal rules; deficits; fiscal policy (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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