stability and growth pact a stability and stagnation pact稳定与增长公约的一个稳定和停滞协议课件

The Stability and Growth Pact: A Stability and Stagnation Pact? Paul De Grauwe University of Leuven Introduction Two issues concerning the Stability and Growth Pact (SGP). lthe long-term objective implicit in the Pact. lthe degree of flexibility provided by the SGP Long-term objective Consensus today: budgetary policies should be such as to lead to sustainable government debt levels Maastricht Treaty has given a practical meaning to sustainability: lsustainable debt level is 60% of GDP. lcorresponding budget deficit consistent with this target debt ratio was put at 3% of GDP. lCondition: the nominal growth of GDP should be 5% Maastricht numerology has important implication (now largely forgotten by the European policy makers thanks to SGP): la country with a debt of 60% and a deficit of 3% is not in danger of finding itself on an unsustainable debt path, lprovided that the medium run nominal growth of GDP is close to 5% Things have changed since the Maastricht Treaty Stability Pact introduced idea that governments should balance the budget over the medium run Implication: the steady state debt ratio that countries should aim at was lowered from 60% to 0%. A formidable change in objectives, that went almost unnoticed at the time the stability pact was agreed upon. Hypothetical evolution of the debt ratios within Euroland assuming that the member countries abide by the pact, and assuming that nominal GDP increases by 5% a year. The GSP-rule may have some justification for Belgium, Greece and Italy as a temporary strategy to quickly reduce the debt levels. It has no economic justification as a permanent strategy. For the countries with debt levels of 60% and less it has no economic justification whatsoever. It is also politically unsustainable Idea behind the SGP is very cynical about capacity of governments to make productive investments. Implicitly, the SGP takes the view that governments are incapable of making productive investments that will benefit future generations. Therefore its debt ratio should be zero. This view does not correspond to economic reality: lGovernments, which invest in physical and human capital, do raise the productive capacity of nations, benefiting present and future generations. A stability and stagnation pact Requirement to bring the debt ratio to zero gives strong political incentives to reduce government investment: lgovernments are required to finance all new investments by current taxation, la large part of the benefits of these investments will be reaped by future governments, lThis gives an incentive to governments today to reduce these investments and only spend on items that benefit the present voters. lThus the GSP is likely to lead to lower government investments and thus lower growth. Why was the SGP introduced? It was introduced to solve the problem of the three highly indebted countries It made sense for these three countries as a temporary strategy The problem is that it was forced on everybody as a permanent strategy Three sinners Everybody must suffer A return to the spirit of Maastricht the Maastricht sustainability criterion implies that a 3% budget deficit is approximately appropriate for most countries of the euro zone lassuming that the nominal growth rate will be close to 5% as a steady state trend. lGood reason to believe that this will be the case Example: France, Germany and Portugal, three countries that have been singled out by the procedures set out in the SGP. If these countries keep their budget deficits equal to 3%, then their debt ratio stabilizes at 60% How much flexibility? The defenders of the stability pact argue that if countries keep a balanced budget over the business cycle, they will have enough flexibility during a recession allowing them to let the budget deficit increase up to 3%. This should be sufficient for most countries to follow an anti-cyclical budgetary policy during most recessions Thus the stability pact instructs countries to be on a high-speed declining debt path before they can hope to exploit the flexibility of the pact. The result of this idea is that the countries that are not on such a path, are forced to reduce their debt to GDP ratio during the present economic slowdown. there is no economic justification for most of the euro zone countries to follow such a strategy in normal times. There is even less justification for such a policy prescription during a recession. During recessions, debt ratios tend to increase Such an increase is desirable to offset deflationary forces Again lets go back to spirit of Maastricht This has two components. countries set a medium term target for the debt ratio, say 60%. in the short-run, deviations around this target are allowed so as to stablize the business cycle. lNote: this is the same as setting a 3% deficit on average over the business cycle and allowing deficits above 3% during recessions. lClearly the rule should be symmetrical, i.e. during booms the deficit should decline below 3%. lWithout such symmetry the debt ratio cannot be stabilized at 60%. Alternative debt criteria There is nothing sacred about 60% One may argue that for some countries the sustainable debt ratio is lower than 60% Here are the possible choices (assuming again 5% nominal GDP growth) Example: Suppose, that the right debt ratio for Germany is 40%, this implies that the steady state deficit that Germany should aim at over the cycle is 2%. Thus even under this more restrictive debt target, there is still no reason to impose a balanced budget over the cycle as the SGP does. One can also reasonably argue that the present deficit overshoot in Germany should be tolerated A Proposal 60% is maximum Each country declares target debt ratio below 60% (e.g. 50%) Warning mechanism starts when debt ratio comes close to 60% Excessive deficit procedure is triggered when debt ratio 60% Conclusion if the Maastri