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Budgetary Policies during Recessions Retrospective Application of the “Stability and Growth Pact” to the Post-War Period

Published online by Cambridge University Press:  17 August 2016

Marco Buti ,
Daniele Franco  and
Hedwig Ongena
Marco Buti
Affiliation:
Directorate-General for Economic and Financial affairs of the European Commission
Daniele Franco
Affiliation:
Directorate-General for Economic and Financial affairs of the European Commission
Hedwig Ongena
Affiliation:
Directorate-General for Economic and Financial affairs of the European Commission
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Summary

Solid budgetary discipline is an essential condition for the success of Economic and Monetary Union (EMU). The “Excessive Deficit Procedure” and the “Stability and Growth Pact” allow some flexibility for the conduct of budgetary policies during severe economic slowdowns. The paper examines whether European Union Member States will have to change their budgetary policies carried out during and after severe recessions, once these procedures become fully operational in the third stage of EMU. The results of this analysis suggest that, when starting from a budgetary position of close-to balance or in surplus, the risk of breaching the 3% reference value is relatively low during one-year recessions but increases in case of deep or protracted recessions. The early years of EMU, when some countries might still have a deficit of about 2% of GDP, are likely to prove highly problematic in the event of a severe recession.

Résumé

Résumé

Une discipline budgétaire rigoureuse est une condition essentielle pour le succès de l'Union Economique et Monétaire (UEM). La Procédure concernant les déficits excessifs et le Pacte de stabilité et de croissance permettent une certaine flexibilité pour la conduite des politiques budgétaires durant des périodes de ralentissement sévère de l'activité économique. Ce papier examine si les états membres de l'Union européenne devront changer leurs politiques budgétaires effectuées durant et après des récessions sévères, une fois ces procédures devenues opérationnelles au cours de la troisième phase de l'UEM. Les résultats de cette analyse suggèrent qu' en partant d'une position budgétaire proche de l'équilibre ou excédentaire, le risque de dépasser la valeur de référence de 3% est relativement bas pour les récessions d'une durée d'un an mais augmente en cas de récessions profondes ou prolongées. Les premières années de l'UEM, alors que certains pays pourraient encore avoir un déficit autour de 2% du PIB, seraient probablement très problématiques en cas de récession sévère.

Keywords

E62H60E62H60
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 63 , Issue 4 , 1997 , pp. 321 - 366
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1997 

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Footnotes

(*)

The views expressed in the paper are those of the authors and do not commit the Commission nor the Commission services. The authors wish to thank DG II colleagues, a number of economists in national administrations and central banks, as well an anonymous referee for useful comments. T. Munzi and J. Pockrandt provided excellent research assistance.

References

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