The Revised Stability and Growth Pact: A First Assessment

In a new IEP@BU Policy Brief, Marcello Messori analyzes the new EU fiscal rules in terms of the principal-agent literature, with a focus on mechanism design. 

What has really changed from the previous version of the Stability and Growth Pact? 

Messori argues that the design of the SGP is based on several quantitative indicators that do not include any binding incentive constraint so that the principal (i.e, the European Commission) imposes a set of fiscal rules on the agents but is unable to induce each of these agents (a member state, specifically with significant fiscal disequilibria) to be ex-post compliant with the commitment imposed ex-ante. 

At the beginning of the revision process, the Commission proposed to include in the SGP few quantitative indicators that are compatible with a binding incentive constraint because member states exercise the national ownership in defining their specific fiscal plans and in selecting the most appropriate national combination between public debt sustainability and economic growth. 

Member States governments imposed quantitative safeguards that partially contradict the Commission’s approach. 

Does the final compromise fix the original sins in SGP, from a principal-agent perspective? 

Messori discusses his new IEP@BU Policy Brief with LSE professor Lucrezia Reichlin. 

Marcello Messori is a part-time professor at the Schuman Centre, European University Institute (EUI), and a member of the EMU-Lab at the same Centre. He is a non-resident Fellow at the Institute for European Policy Making (IEP), Bocconi University. He is co-coordinator of the ‘Gruppo Europa’ at Astrid Foundation.

Lucrezia Reichlin is a Professor of economics at the London Business School and an external fellow at the Brussels-based think-tank Bruegel. She was director general of research at the European Central Bank from 2005 to 2008.

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

If you want to stay up-to-date with the initiative of the Institute for European Policymaking@Bocconi University, subscribe to our monthly NEWSLETTER here.