It Is Broken. Can It Be Fixed? A Look at the European Union's ...

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• As is the case with the deficit to GDP ratio, the debt to GDP ratio for France and Germany has worsened since 2001. Both countries now exceed the 60 percent reference value and continue to worsen. In addition, Portugal’s deficit to GDP ratio continues to worsen from its best year, 2000, and for the second year running is in excess of 60 percent. • The same comment concerning Greece’s data, as made above, is applicable here as well. Notice that its debt to GDP percentage increased from 104.7 percent in 2000 to 114.8 percent the next year, leading to the suspicion that its data for 2000 and earlier years was inaccurate. • It is perhaps reasonable to conclude that because ECOFIN’s primary focus has been on what to do about the deficit to GDP ratio, that it has ignored the resulting debt to GDP ratio. In its 2002 report to the Council and the European Parliament, the Commission called for renewed attention to the importance of debt. Only two of the newly admitted member states have a debt to GDP ratio in excess of the 60 percent reference point. Malta’s ratio is 75 percent while Cyprus’ ratio is 71.9 percent. At the other extreme, Estonia is again the shining light. Its debt to GDP ratio is 4.9 percent, the lowest of the EU-25. Critique of the Stability and Growth Pact The original goal of the Stability and Growth Pact was to safeguard the sustainability of public finances in EMU. However, according to some experts, this goal has become less clear over time, moving towards the more ambitious goals of ensuring that all countries follow sensible, if not optimal, fiscal policies. The Stability and Growth Pact is viewed as too intrusive and aggressive to achieve the original goal of sustainability of public finances. On the other 10
hand, its rules are not strict enough to enforce optimal fiscal policies. Obviously, the Stability and Growth Pact cannot achieve both goals. The 3% deficit limit and the 60% debt limit were originally chosen to be consistent with a stable debt ratio and a trend annual growth rate of nominal GDP of 5%. With 5% growth, the increase in debt implied by a 3% deficit exactly offsets the reduction in a debt ratio of 60%. It is now clear, however, that the EMU countries did not and will not grow uniformly at a rate of 5% annually. Some countries achieved growth rates significantly above that rate; others, Germany and France in particular, achieved less than that (Fatas,Von Hagen, Hallett, Strauch, and Sibert, 2003, p. 51). As a result, slow growing economies, like France and Germany, can experience rising debt ratios (which they have), even if they stay below the 3 percent deficit limit (which they haven’t). For countries with high growth rates, especially the newly acceded countries, the 3 percent deficit limit will prove unduly restrictive. In short, these limits are simply not flexible enough. Henrik Enderlein suggests that fiscal policy within a monetary union is really a Catch-22 situation. The conduct of domestic fiscal policies in a monetary union is subject to two largely opposite requirements. On the one hand, member countries need to be given some autonomy to undertake stabilizing fiscal measures in the domestic economy. On the other hand, member countries’ fiscal autonomy needs to be reduced if there is a credible risk that a country seeks free-riding on overall systemic stability (Enderlein, 2004, p. 1039). He suggests that by definition the focus of the SGP is on the latter requirement and that based on the first six years of EMU, this requirement should be given much less emphasis. 11
Page 1 and 2: Submission Form Author’s Name: Af
Page 3 and 4: • Budgetary discipline: a governm
Page 5 and 6: (9) If a Member State persists in f
Page 7 and 8: • Dissuasive elements which in th
Page 9: is so strong that the British don
Page 13 and 14: states’ revenue failed to grow at
Page 15 and 16: • Debt rules. The argument here i
Page 17 and 18: with a subsequent report to the Eur
Page 19 and 20: especially on the part of the large
Page 21 and 22: • Take better account in Council
Page 25 and 26: References Begg, I. and Schelkle, W
Page 27: Martin, A. (2005). Blame the ECB, N

It Is Broken. Can It Be Fixed? A Look at the European Union's ...

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