Today's Financial Economics lecture gets all macro on yo'azz, as I try to get my head around why the Stability and Growth pact (SGP) is important to Ireland's policy makers today. Many authors (see here and here) are arguing either for a relaxation of the constraints the SGP or for a moratorium on fines imposed on countries who will break the SGP this year. See here for a table of 2008's laggards. 2009's table will be similarly affected.
The SGP has many requirements, but, in short, to comply with the pact, EU members must achieve a close to balance or surplus budgetary position, and change their fiscal policies to make sure they refrain from spending their 'growth dividend' when things are going well in an upturn. When things are going poorly, spend that dividend, and all will be well. Except, well, Ireland didn't do that. Is it time to break the rules?
The handout of the slides is here.
Readings
R.Beetsma and H. Uhlig An Analysis of the Stability and Growth PactThe Economic Journal, Vol. 109, No. 458 (Oct., 1999), pp. 546-571
M Buti , D Franco, and H Ongena Fiscal discipline and flexibility in EMU: the implementation of the Stability and Growth Pact Oxford Rev. Econ. Policy 14: 81-97. (.pdf)
EU, Public Finances in EMU, 2008.
Europa, Ireland's 6.3% deficit in breach of stability and growth pact