The Stability (and Growth) Pact and Monetary Policy

The ECB has a very clear idea of what European governments should do in the name of ‘sound’ economic management: balance the budget, reduce the role of the state in the economy by cutting public expenditures; increase the flexibility of labour markets by shrinking the welfare state (see for example the ECB’s Monthly Bulletin April 2002), and increase competition in both product and labour markets. Structural reforms mean, in particular, reducing employment protection and the generosity of the system of unemployment benefits. It is expected that such a comprehensive policy framework will lead to an increase in work’s incentives (lower taxes allowed by the decrease in public expenditure, and lower unemployment benefits), higher growth and lower inflation pressures (through the increase in the intensity of competition). This conception of the policy mix in a broad sense is fully mainstream, which is also fully normal, as nobody would expect that a central bank hold explicitly an heterodox position. It is thus utterly normal that the ECB take an active role in the budgetary debate, especially if this debate leans towards a possible reform of the SGP, which may be interpreted by the Bank as a reduction in the degree of cooperation from National States. The Stability and Growth Pact has indeed been designed also as an instrument to enforce the cooperation of European governments towards the aim of the ECB, namely price stability (...).