The Stability and Growth Pact is an agreement between the 17 members of the euro area that aims to promote price stability as well as facilitate the growth of all of the members. The pact says that no one member should have a government spending deficit of more than 3% of GDP annually, and that total government debt not be more than 60% of GDP. The idea is that it limits fiscal irresponsibility that could lead to inflationary pressure on the euro.
There are many criticisms of the stability and growth pact, as some say that it lacks flexibility due to the fact that it is over a year rather than over the course of an economic cycle. This could be seen as unfair as governments regularly need to borrow more money during times of recession, money that they can then pay back during boom. Another criticism is that it seems to be somewhat unenforceable - especially in the larger countries like Germany and France who have both run "excessive" deficits for a long time.
Some of the difficulties of reducing government debt and spending deficits in the EU in order to comply with the stability and growth pact are outlined in the most recent post made on this blog. http://econ.economicshelp.org/
"The pact says that no one member should have a government spending deficit of more than 3% of GDP annually, and that total government debt not be more than 60% of GDP"
ReplyDeleteThat gives consistency - but how does it give stability?
Running a high deficit can lead to problems that require a bailout or require governments to print more money (which is clearly inflationary).
ReplyDeleteIt could also lead to a reduction in the credit rating given to a country which means in the future, loans given to the country would have higher interest rates.
How is printing money inflationary if there is a high negative output gap - which is likely if there is a big deficit.
ReplyDeleteIt can be easy to misinterpret the data and print too much.
ReplyDeleteThough I agree, it can be used to some extent.