VOLUME XIII
WINTER 2005

THE OPTIMALITY OF THE STABILITY AND GROWTH PACT: A STRATEGIC FOCUS
 
JUAN CRISTÓBAL CAMPOY
JUAN CARLOS NEGRETE

Universidad de Murcia
 
This paper analyzes in contrast to the Stability and Growth Pact (SGP) adopting a strategic approach. In contrast to the literature on this European institution, we consider a more general framework which takes account of the interactions between the EMU and the US. We conclude that penalizations on deficit in the euro zone create an incentive for the US to relax its fiscal discipline which increases international interest rates, reducing world growth. As a consequence, designing sanctions without considering this effect could be counterproductive. In addition, a greater degree of coordination with other currency areas is required for this mechanism to be more beneficial for the member countries.
 
Key words: budget deficit, externalities.
JEL classification: E58, F41.

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