Publications
Strengthening the Stability and Growth Pact with a common eurozone bond
| Author: | John Springford |
| Date of Publication: | August 2009 |
| Download: | Strengthening the Stability and Growth Pact with a common eurozone bond |
“Time to reform the eurozone’s Stability and Growth Pact”
The current rules of the Stability and Growth Pact will not encourage eurozone governments to deal with their debts, argues a new report from the liberal think tank, CentreForum.
The current system doesn’t work. The pact failed to constrain eurozone governments from running large deficits, even in the boom times. It was watered down by France and Germany, and then ignored by other governments: Greece, for example, has run a budget deficit above the pact’s ceiling of 3 per cent of GDP for five of the last six years, without sanction.
It is vital that governments start to pay down their debt once the economy improves, and that their finances remain closer to balance over the next economic cycle. But as the crisis moderates, governments may again be tempted to borrow as yields investors demand fall.
In the paper, entitled ‘Strengthening the Stability and Growth Pact with a common eurozone bond’, CentreForum argues that governments need an incentive to balance their budgets. Eurozone governments should agree to set up a common bond system, through which a government may issue debt once it has raised taxes and/or cut spending, and its debt-to-GDP ratio is declining. A common bond would offer the most indebted governments access to a cheaper and more liquid debt market. But insisting that they make budgetary reforms before they can issue debt through the instrument should prevent them from overloading it, driving up the interest rate.
Commenting, the report’s author John Springford said:
“The German government fears that government bailouts would encourage bad behaviour. However, our proposed bond would discourage fiscal irresponsibility, as it would only be available to governments that were taking active steps to pay down debt.”