Budgetary Policies during Recessions Retrospective Application of the “Stability and Growth Pact” to the Post-War Period

Abstract

Summary Solid budgetary discipline is an essential condition for the success of Economic and Monetary Union (EMU). The “Excessive Deficit Procedure” and the “Stability and Growth Pact” allow some flexibility for the conduct of budgetary policies during severe economic slowdowns. The paper examines whether European Union Member States will have to change their budgetary policies carried out during and after severe recessions, once these procedures become fully operational in the third stage of EMU. The results of this analysis suggest that, when starting from a budgetary position of close-to balance or in surplus, the risk of breaching the 3% reference value is relatively low during one-year recessions but increases in case of deep or protracted recessions. The early years of EMU, when some countries might still have a deficit of about 2% of GDP, are likely to prove highly problematic in the event of a severe recession.

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