This document discusses the Stability and Growth Pact (SGP) which establishes fiscal rules for EU member states. The SGP requires countries to maintain an annual budget deficit below 3% of GDP and a national debt level below 60% of GDP. If a country exceeds these limits it is subject to excessive deficit procedures and sanctions. The document argues that the SGP is problematic because the rules are applied over only one year rather than whole business cycles, rules are inconsistently applied across countries, and key terms are vaguely defined. It concludes that given Ireland's current economic situation, it may be time to loosen the SGP rules to allow Ireland more flexibility with fiscal policy.

1. THE STABILITY & GROWTH
PACT: TIME TO BREAK THE
RULES?
Dr Stephen Kinsella | stephen.kinsella@ul.ie |stephenkinsella.net

2. LAST TIME
Domestic & International Money Markets

3. THIS TIME
S&G Pact:
what it is
how it works
We should think about changing it

4. WHAT IS THE SGP?
Articles 99 & 104 of EC/
Maastricht Treaties
Carrots & Sticks for
implementation of fiscal
discipline
Maastricht Criteria:
1. Budget Deficit < 3% of
GDP p.a.
2. National Debt < 60% of
GDP
3. ...and more

5. HOW DOES IT WORK?
Directorate-General for Economic
and Financial Affairs monitors EU
countries’ budgets
Apply Maastricht criteria
If Pass, then OK
If Fail, then not OK-> Excessive
Deficit Procedure & Sanctions

6. Ireland’s Budget Deficit as a % of GDP
2.5
0
-2.5
-5.0
-7.5
-10.0
2007 2008 2009 2010 2011 2012 2013
General Govt. Revenue-General Govt expenditure, %GDP
EU: Public Finances in EMU, 2008:222

7. EXCESSIVE DEFICIT
PROCEDURES
Applied over 7 countries in
2007
Applied to Ireland in Feb this
year.
Why?
Ireland’s deficit at 6.3%+
Ireland’s debt:GDP ratio will
increase above 60% in 2010

8. PRIORITIES OF SGP
Medium term budgetary position of ‘close to surplus’
Sustainability of ‘Quality’ Public Finances
Achieve low core inflation through fiscal prudence
‘Normal’ vs ‘Exceptional’ economic conditions

9. PROBLEMS WITH SGP
Rules applied over 1 year, not over a Business Cycle (YET).
Rules inconsistently applied (Portugal vs. France)
Definition of ‘close’, ‘temporary’, and ‘exceptional’

10. TIME TO BREAK THE RULES
WITH A GRIN?
Rules constrain Irish fiscal policy greatly
stop us entering into any kind of expansionary policy
Not good in this situation, see Cournot paper.
Why? Monetary Policy can’t support Fiscal Policy in Ireland

11. NEXT TIME
Default Probabilities
and Defunct States:
Ireland and Iceland