EU's Prodi Calls Deficit Reduction Accord "Stupid"
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The relaxation of budget discipline is in general a bad idea but there are exceptions
Sarkozy’s postponement of the balancing of France’s budget in compliance with the European Union stability and growth pact by two years until 2012 has immediately attracted widespread condemnation by the European Commission and several EU governments
This hurried, almost mechanical reaction is misguided
Charles Wyplosz, FT July 5 2007
The writer is professor of economics at the Graduate Institute of International Studies in Geneva
The relaxation of budget discipline is in general a bad idea but there are exceptions.
What about the stability and growth pact, then?
The pact was invented to enforce fiscal discipline. This does not mean an improved budget balance this year or that one. Properly understood, fiscal discipline means that the public debt does not get out of hand and that it eventually declines to an acceptable level. No one can safely define what an acceptable level is, but that is not the issue. The crucial word is “eventually”. For some countries, it may mean next year. For a country under deep economic transformation, it means “when the reforms have been passed and produce their intended effects”, in effect many years down the road.
In fact, the 2005 revision of the stability and growth pact acknowledged this view. It explicitly recognised that deviations from fiscal rectitude can be justified when big institutional reforms are undertaken.
Comment by Rolf Englund:
The Stability Pact was invented as a PR gimmick to persuade the German voters to give up their D-Mark.