The Domestic Stability Pact: Assessment of the Italian experience and comparison with the other EMU countries

Abstract

The 1999-2006 versions of the Italian Domestic Stability Pact had many shortcomings and a modest impact with respect to the aim of aligning the fiscal behaviour of sub-national government units with the national commitments under the European Stability and Growth Pact. The Domestic Pact was revised in 2007 and 2008 to tighten the monitoring and sanctions framework and prevent some inefficient behaviour. However, some undesirable features still mar the new regime: no coordination exists between the Domestic Pact and the debt and tax constraints applied to local governments; a clear definition of the contribution of sub-national governments to aggregate compliance with the external rule is still lacking; flexibility has been introduced by means of an artificial reference budget balance; side effects on resource redistribution are ignored; and monitoring and sanctioning remain weak. Remedies for the above shortcomings can possibly be found in the domestic pacts of the other EMU countries. Most of all, the Domestic Pact should be adjusted to the specific characteristics of fiscal decentralization in Italy, where a large fiscal gap exists, revenue autonomy is constrained and a large share of the responsibility for spending is rigid and politically sensitive