The new rules of the Stability and Growth Pact. Threats from heterogeneity and interdependence

This paper examines the new SGP rules that should govern fiscal policies of the EMU member countries by means of dynamic models of the debt/GDP ratio. The focus is on factors of heterogeneity and interdependence in the three key variables that may affect the debt/GDP evolution in a multi-country setup like a monetary union: the real growth rate, the inflation rate and the nominal interest rate on the sovereign debt stock. These factors are almost ignored in the SGP intellectual and institutional framework, but they can jeopardize the main goal of fostering convergence and keeping debt/GDP ratios equalized and stable over time. Even the return of growth, inflation and interest rates to their pre-crisis tendential values, a not so likely and imminent event, will probably be insufficient to create a favourable environment for smooth debt/GDP convergence across EMU countries.