The main criticism around the effectiveness of the Stability and Growth Pact as a fiscal rule is:

Question

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We begin by restating the question and listing the answer choices to ensure clarity of what is being evaluated.
Question: The main criticism around the effectiveness of the Stability and Growth Pact as a fiscal rule is:
Options:
- a. It encourages counter-cyclical fiscal policy during downturns
- b. It allows ECB interference in national budget allocations
- c. It is pro-cyclical, exacerbating recessions in weak economies
- d. It creates moral hazard through overly lenient enforcement

Now, let’s analyze each option in turn, highlighting why it might be seen as true or false and what the mainstream critique actually emphasizes.

Option a: It encourages counter-cyclical fiscal policy during downturns
- This statement means the pact would promote spending cuts or deficit reduction during recessions, which would be counter-cyclical in a harmful way. In fact, the standard critique is opposite: the SGP imposes strict deficit rules that can force consolidation during downturns, which is pro-cyclical, not counter-cyclical. Therefore, this option misstates the actual effect and is incorrect in describing the pact.

Option b: It allows ECB interference in national budget allocations
- The Stability and Growth Pact is primarily a set of fiscal rules at the EU level, with enforcement mechanisms through the European Commission and EU councils; it does not grant the ECB the power to allocate or direct national budgets. The ECB operates as the central bank and does not generally map budgets; its monetary policy stance sometimes interacts with fiscal constraints, but this option mischaracterizes institutional roles. Hence, this option is inaccurate.

Option c: It is pro-cyclical, exacerbating recessions in weak economies
- This is the core critique often highlighted in analyses of the SGP. When economies face downturns, the rules constrain deficits and may require austerity measures or spending cuts to meet targets, which reduces aggregate demand precisely when it should be supporting it. This pro-cyclical tightening can deepen recessions in weak economies and hinder recovery, making this option align with the established criticism.

Option d: It creates moral hazard through overly lenient enforcement
- The pact is typically described as having strict enforcement mechanisms, including penalties and procedural steps for non-compliance. The common complaint is not that enforcement is overly lenient, but that enforcement can be inconsistent or limited in effectiveness, and that even with penalties, the political economy constraints can lead to insufficient discipline. Therefore, this option does not accurately capture the primary critique.

In summary, option a is incorrect because the critique targets pro-cyclical tendencies rather than counter-cyclical encouragement; option b is incorrect due to misattributing budgetary control to the ECB; option c correctly identifies the widely discussed pro-cyclical nature and its harming effect on weak economies; option d is incorrect because it reverses the typical concern about enforcement. The analysis shows why each choice stands as it does, with the central argument centering on the pro-cyclical impact of the pact during downturns.

SESS0026_25-26 MCQ TEST (30%) in-class 11th December 2025, 1pm

The main criticism around the effectiveness of the Stability and Growth Pact as a fiscal rule is:

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