A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact

Jean-Paul Fitoussi and Francesco Saraceno ()

No 2002-07, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: This paper reviews the arguments in favour and against the Stability and Growth Pact signed by the countries of the Euro area. We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be reversed to yield opposite, and equally plausible conclusions. We therefore suggest the view that the stability pact is a social norm, and that adherence to that norm responds in fact to the need to preserve reputation in front of the other members of the European Union. Using this extreme but not implausible hypothesis, we build a simple model similar in spirit to Akerlof’s (1980) seminal paper on social norms, and we show that reputational issues may cause the emergence of a stable and inferior equilibrium. We further show that, when with the enlargement a number of countries anxious to prove their ‘soundness’ will join the Union, the problems posed by the pact/social norm are likely to increase.

Keywords: Stability Pact; Stabilization Policies; Social Norms; Reputation; Enlargement (search for similar items in EconPapers)
JEL-codes: D63 D71 E62 E63 (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-eec and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Working Paper: A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact (2002)
Working Paper: A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:0207

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