15 July 1997 • Economic Policy Considerations Concerning the Stability and Growth Pact • Helmut Kramer

The Stability Pact emphasizes monetary priorities in a European policy context. It is steeped in the spirit of fundamental skepticism vis-à-vis state intervention in structural developments and economic cycles and vis-à-vis all attempts to justify public indebtedness.

Simply ignoring macroeconomic relationships within the business cycle, a hallmark of this attitude, has already led to foreseeable problems in the vanguard of EMU with regard to synchronous budget consolidation and has generated destabilizing trends in politics and on the markets. These relationships will not go away by the simple expedient of issuing demonstratively unanimous and spirited statements at various EU summits.

It would be appropriate to consider tools with a better scientific foundation in order to secure a stable Euro. In this context, the first point to be discussed would have to be the extent to which political sanctions at Community level are required to force some members to pursue a sound fiscal policy.

One might be forgiven to think that the provisions of the Maastricht Treaty to ensure a stable Euro were sufficient (co-ordination of economic policies as per Article 103 of the Union Treaty; prohibition to finance public households through the Central Bank in Article 104; budget monitoring procedures according to Article 104c; the ban on bail-out in Article 104b; independence of the European Central Bank under Article 105).

If the budget development of a member state threatens its credit rating, this will automatically lead to sanctions against this state by the capital markets, regardless of EMU. The sanctions will be the more stringent the less a country can expect to be bailed out by its partners.

The fear that the ban on bail-outs (Article 104b of the Union Treaty) will be soon broken by the forces of political reality is occasionally overstated. While in practice the country's rating will deteriorate, we should not assume a priori massive transfers from its partners and, as a result, insufficient political efforts by that state to consolidate its budget.

Occasionally it is stressed that there is actually no need for a formal pact and even less for financial sanctions because a certain degree of confidence in the equitable cooperation between partners is a precondition for entering into Economic and Monetary Union, and the threat of detailed sanctions is no substitute for such confidence. If member states were to exhibit a fundamental distrust of their partners' economic policies this would indeed make for a shaky foundation of EMU.

Sanctions other than financial ones are conceivable, such as restricting or suspending voting rights in the Council or European Central Bank, or obliging member states to adopt appropriate national constitutional provisions or committing them to binding inflation goals.

It might well be that some of the problematic effects of the fines – such as a direct aggravation of the budgetary situation in the member state – could be avoided in this manner but this begs the question of whether enforceability at a political level is the main point of such threats.

Nevertheless there are sound reasons for arguing that, given the continued autonomy of member states in key issues of economic policy, this should make them subject to more precise commitments than those in the Maastricht Treaty. Even in western Europe, moral hazard and free-riding cannot be fully excluded.

It seems advisable for the future to put the Stability Pact on a more solid scientific and politically more realistic basis. Developing such a basis is bound to cost EU member states quite some effort in empirical work and serious discussion. Even in Austria, in spite of political consent to the Stability and Growth Pact, its scientific discussion did not start until recently. Yet, until it is possible to revise the Stability Pact on the basis of such a process, it would be advisable to avoid a too narrow interpretation of the contractual commitments.