[Article] Stability and Growth Pact II: Incentives and Moral Hazard

Presentation of the new Stability and Growth Pact (SGP), the European Union’s (EU) answer to concerns about fiscal unsustainability, amended on 20 March 2005.

André Fourçans (ESSEC Business school, France) , Thierry Warin https://www.warin.ca (HEC Montréal and CIRANO (Canada))https://www.hec.ca/en/profs/thierry.warin.html
02-28-2007

Abstract

Adopted in 1997 and implemented in 1999 with the euro, the Stability and Growth Pact (SGP) addresses concerns of budgetary discipline in the Economic and Monetary Union (EMU). After many breaches and the failure of the implementation of fines, Europe amended the SGP on 20 March 2005. In the new institutional design, the preventive element is now tighter, but the dissuasive element is laxer. Using a game theoretical approach emphasizing the notion of moral hazard, we find that the new design does not prevent countries from engaging in moral hazard behaviors and countries will thus be less inclined to abide by the SGP.

Keywords: Monetary union, economic integration, fiscal rule, Stability and Growth Pact


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Citation

For attribution, please cite this work as

Fourçans & Warin, "Thierry Warin: [Article] Stability and Growth Pact II: Incentives and Moral Hazard", Journal of Economic Policy Reform, 2007

BibTeX citation

@article{fourçans2007[article],
  author = {Fourçans, André and Warin, Thierry},
  title = {Thierry Warin: [Article] Stability and Growth Pact II: Incentives and Moral Hazard},
  journal = {Journal of Economic Policy Reform},
  year = {2007},
  note = {https://warin.ca/posts/article-growth-pact/},
  doi = {10.1080/17487870701213599}
}