“Rethink and Reset”: Time to Get Rid of The Stability and Growth Pact?

Christine Lagarde, the Managing Director of the International Monetary Fund, recently asked for a “rethink and reset” of the numerical ceilings in the Stability and Growth Pact (SGP). Designed to promote fiscal discipline in EU and euro zone member states, it limits government budget deficits to 3 per cent and public debt levels to 60 per cent of GDP. But exactly what did these ceilings bring, apart from a constant fierce ideological dispute over their enforcement? What would happen if they were abolished? The simple fact is that the SGP has not limited public debt accumulation. Importantly, capital markets do not pay any considerable attention to it. The pact is is still enshrined in EU law, but its flawed foundation, and the aversion to it by governments, is creating enormous costs of policy coordination at national as well as EU level. Arguably, these ceilings are superfluous. If market discipline would be restored, the only necessary component of a SGP is effectively harmonised national statistical accounts, bringing transparency to fiscal policy.