Normes sociales et politiques européennes

This paper reviews the debate on the Stability and Growth Pact. Both empirical and theoretical arguments in favour of the Pact are weak, to warrant a different and plausible (even if extreme) hypothesis: We suggest the view that the Stability Pact is a public social norm, obeyed by countries because of the fear of reputation losses. Our simple model shows that reputation issues may cause the emergence of a stable but inferior equilibrium. Within this framework, the enlargement to more undisciplined countries may worsen the problems posed by the Pact. JEL Classification: D63, D71, E62, E63.