Opinion: Stability & Growth Pact focus should be on public debt

Abandon the annual budget deficit criterion and focus instead on
medium-term targets for public debt, argues Charles
Wyplosz in the Financial Times.

Writing in the Financial Times, Charles Wyplosz, a
professor of economics at the Graduate Institute of
International Studies in Geneva, argues that, although the
existing Stability and Growth Pact was “so rigid that it could not
work”, the flexibility proposed by German Chancellor Gerhard
Schröder is “excessive”. Schroder’s proposal that the budget
deficit limit of 3% be lifted when governments do good things or
face difficult economic conditions is too “vague” for the
economist, who says that this effectively means the decision will
be left to political appreciation of the Council of
Ministers.

Such a scenario would be a “recipe for disaster”, both failing
to enforce fiscal discipline and deepening the growing rift between
small and large countries.

His solution is for countries to set their own
commitments in terms of medium-term targets for public
debt and then have them validated by the parliaments of each
member state and negotiated with the others.

For Wyplosz, the only valid definition of fiscal sustainability
is that the public debt – as a share of gross domestic product –
does not grow without limits. Two of the pact’s “lethal
characteristics” were its focus on annual budget deficits and its
way of dispossessing national governments and parliaments from
their sovereign right to set fiscal policy. The revised stability
pact should concern itself only with stabilising debts, ideally
bringing them down to more comfortable levels than at present,
argues the writer.