Home > Publications > Network Papers > A Theory of Social Custom of Which Soft Growth May Be One Consequence

A Theory of Social Custom of Which Soft Growth May Be One Consequence

Tales of the European Stability Pact

Jean-Paul Fitoussi, Francesco Saraceno

Paper  310kb pdf

This paper reviews the arguments in favour and against the Stability and Growth Pact signed by the countries of the Euro area. We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be reversed to yield opposite, and equally plausible conclusions. We therefore suggest the view that the stability pact is a social norm, and that adherence to that norm responds in fact to the need to preserve reputation in front of the other members of the European Union. Using this extreme but not implausible hypothesis, we build a simple model similar in spirit to Akerlof’s (1980) seminal paper on social norms, and we show that reputational issues may cause the emergence of a stable and inferior equilibrium. We further show that, when with the enlargement a number of countries anxious to prove their ‘soundness’ will join the Union, the problems posed by the pact/social norm are likely to increase.

About the Authors

Jean-Paul Fitoussi
Professor of Economics
Institut d'Etudes Politiques de Paris

Francesco Saraceno
Sciences Po Institut d'Etudes Politiques de Paris

Publication Information

Type Network Paper
Program Macroeconomic Policy
Posted 10/16/02
Download 310kb pdf
# Pages 24