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Searching for the Optimal EMU Fiscal Rule: An Ex-Post Analysis of the SGP Reform Proposals

Over last decades the study of fiscal policy rules has attracted a growing attention from researchers and policy-makers. The case of European Monetary Union is a clear example. However, even before its inception, the Stability and Growth Pact has been a source of inspiration for a large number of policy recommendations. The heated political and academic debate intervened after the Ecofin Council’s decision on November 2003 and mostly concluded in March 2005 with the Spring European Council’s conclusions has revealed the institutional and theoretical weaknesses of EMU rule-based system. This paper provides an ex-post analysis of the Pact by indicating a different qualitative and pragmatic approach to judge the most relevant and known SGP reforms; furthermore, it highlights the direction along which any modification of the Pact would have been successfully implemented and offers useful insights also to test the robustness of the new SGP. After revisiting the main characteristics of a fully effective rule-based framework and taking into account the specificity of EMU economic policy set up, we evaluate in a systematic way, through a multivariate statistical analysis, about 100 proposals for reforming the SGP presented by professional academic and non-academic economists prior to April 2005. Despite these large number of proposals, however, principal component analysis outcomes show that only few reforms could have been effectively considered a real improvement of the previous version of SGP, the others reflecting the traditional dilemma between credibility and effectiveness aspects of budgetary rules.