FISCAL POLICY IN THE MONETARY UNION: THE STABILITY AND GROWTH PACT. Week 7 Ch.10. References. De Grauwe, P. chapter 10 Reading material : 1 ) De Grauwe, P. ( 2003 ), “ The Stability and Growth Pact in Need of Reform” (written before the 2005-reform, which we’ll investigate next time).
1) De Grauwe, P. (2003), “The Stability and Growth Pact in Need of Reform”
(written before the 2005-reform, which we’ll investigate next time).
2) “Ties that bind” (2004), article from The Region
3) “Reform of the Stability and Growth Pact” - article from “Monetary Policy and the Economy”
4) “The Reform of the SGP: an Assessment” – Speech by Josè – Manuel Gonzalez-Paramo, member of the Executive Board of ECB – Frankfurt – October 2005.
Germany GROWTH PACT
1) Government spending (goods, services, investment): it directly creates demand
2) Taxation: it affects private consumption by increasing / decreasing consumers’ disposable income
3) Transfers (social security, unemployment benefits, and so on): same as taxation
DEFICIT = 1+3 -2 = G+Tr – T
1) When GDP is below potential (or even in recession):
a) Increase G
b) Decrease T
c) Increase Tr
= INCREASING THE DEFICIT
So that aggregate demand increases and GDP growth can go back to potential.
2) When GDP is above potential
= REDUCING THE DEFICIT
So that the economy cools down and avoid inflationary pressures.
FEDERAL STATE OR INTERNATIONAL ORGANIZATION ?
No further step of European integration can ever be taken if this question does not receive an adequate answer.
1) Change the numbers, making sure that this time we get the growth right?!?!?!
2) “Golden rule”: distinguish between government expenditure in investment (which are good for growth) and public consumption.
No. You would spend the next ten years establishing what’s investment and what’s public consumption.
And who said that all investments are good for growth and all kinds of public consumption are not?!
a) periods of negative growth
b) prolonged periods of growth below potential
c) structural reforms that the government is
Structural reforms have clear upfront fiscal costs but potential long-term benefits that could justify temporarily higher deficits.
Both these aspects are not-compatible with a monetary union, where monetary policy (=determination of short term interest rate, who affects the whole term structure) is managed by ECB and has the explicit task of fighting inflation.
Allowing full flexibility of national fiscal policies, allow member States to enjoy the benefits of them (=aggregate demand expansion) without paying the costs (=higher interest rate).