Reconciling Stability and Growth: Smart Pacts and Structural Reforms

Roel Beetsma and Xavier Debrun

No 3930, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the decision of a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact. We provide suggestive evidence that structural reforms - in particular labour market reforms - may lead to substantial outlays by the government, for example to buy political support. To the extent that the reform package entails up-front costs, the model shows that a pact may harm structural reforms, sacrificing future growth for present stability. Since electoral uncertainty creates an expansive fiscal bias, the welfare gains brought about by a pact depend on a trade-off between the reduction in the deficit bias and the induced reduction in the amount of structural reform. Imposing a pact becomes more attractive if it takes into account the up-front costs from structural reforms when evaluating the member states' fiscal stance. Therefore, the analysis lends support to a recent proposal by the European Commission for a more flexible implementation of the Stability and Growth Pact in this respect.

Keywords: Structural reforms; Stability and growth pact; Monetary union (search for similar items in EconPapers)
JEL-codes: E42 E61 F33 (search for similar items in EconPapers)
Date: 2003-06
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (25)

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Journal Article: Reconciling Stability and Growth: Smart Pacts and Structural Reforms (2004)
Working Paper: Reconciling Stability and Growth: Smart Pacts and Structural Reforms (2003)
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