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The Stability and Growth Pact (SGP) is an agreement by European Union member states related to their conduct of fiscal policy, to facilitate and maintain Economic and Monetary Union of the European Union.

It is based on Articles 99[1] and 104[2] of the Treaty Establishing the European Community (with the amendments adopted in 1993 in Maastricht), and related decisions. It consists of fiscal monitoring of members by the European Commission and the Council and, after multiples warnings, sanctions[3] against offending members.

The pact was adopted in 1997,[4] so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them.
The actual criteria that member states must respect:

  • an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
  • a national debt lower than 60% of GDP or approaching that value.

The SGP was initially proposed by German finance minister Theo Waigel in the mid 1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German strong economy's performance since the 1950s; the German government hoped to ensure the continuation of that policy through the SGP which would limit the ability of governments to exert inflationary pressures on the European economy.

Contents

Criticisms

The Pact has been criticised by some[5] as being insufficiently flexible and needing to be applied over the economic cycle rather than in any one year. They fear that by limiting governments' abilities to spend during economic slumps it may hamper growth. On the contrary, other critics think that the Pact is too flexible; the Cato Institute writes: "The fiscal constraints introduced with the new currency must be criticized not because they are undesirable—in my view they are a necessary component of a liberal order—but because they are ineffective. This is amply evidenced by the “creative accounting” gimmickry used by many countries to achieve the required deficit to GDP ratio of 3 percent, and by the immediate abandonment of fiscal prudence by some countries as soon as they were included in the euro club. Also, the Stability Pact has been watered down at the request of Germany and France."[6]


Some remark that it has been applied inconsistently, after the Council of Ministers failed to apply sanctions against France and Germany, despite punitive proceedings being started when dealing with Portugal (2002) and Greece (2005), though fines were never applied. In 2002 the European Commission President (1999-2004)[7] Romano Prodi described it as "stupid"[8], but was still required by the Treaty to seek to apply its provisions.

The pact has proved not to be enforceable against big countries such as France and Germany, which, ironically, were the biggest promoters of it when it was created. These countries have run "excessive" deficits under the pact definition for some years. The reasons that larger countries have not been punished include their influence and large number of votes on the Council of Ministers, which must approve sanctions; their greater resistance to "naming and shaming" tactics, since their electorates tend to be less concerned by their perceptions in the European Union; their comparatively weak commitment to the euro as compared to smaller states; the relatively greater role of government spending in their larger and more enclosed economies.

Reform

In March 2005, the EU Council under the pressure of France and Germany relaxed the rules; the EC said it was to respond to criticisms of insufficient flexibility and to make the pact more enforceable[9]. The Ecofin agreed on a reform of the SGP. The ceilings of 3% for budget deficit and 60% for public debt were maintained, but the decision to declare a country in excessive deficit can now rely on certain parameters: the behaviour of the cyclically adjusted budget, the level of debt, the duration of the slow growth period and the possibility that the deficit is related to productivity-enhancing procedures. [10]

The pact is part of a set of Council Regulations, decided upon the European Council Summit 22-23 March 2005. [11]

Member states by SGP criteria

The deficit criterion is applied to both Eurozone and non-Eurozone EU member states. Data in the table are for the year 2006 : EC's "Public Finances report" [1] (?)

Data for 2008 are here : http://ec.europa.eu/economy_finance/publications/publication12832_en.pdf

Data including projections to 2010 can be found in http://ec.europa.eu/economy_finance/publications/publication15390_en.pdf

Country Government finances Past breach
periods
for deficit
Deadline for
compliance
for deficit
Past breach
periods
for debt
Deadline for
compliance
for debt
annual government deficit to GDP gross government debt to GDP
Reference value min. -3% max. 60%
Austria -1.9% 62.4% 1995-1997 2003-  ?
Germany -1.7% [2] 68.9% 1994; 1996; 2003-2006 2007 2003-  ?
France -3.0% 66.9% 2003-2007 2005 2003-  ?
Italy -1.9% 104% 2003- 2007 2003-  ?
Luxembourg -1.8% 7.9%
Netherlands -1.2% 51.2% 2004-2005 2005
Belgium -0.3% 90% 2003-  ?
Spain +0.9% 40.0%
Portugal -2.2% [3] 63.5% 2002; 2005-2006 2002; 2008 2005-  ?
Finland +2.8% 39.7%
Ireland +0.1% 27.2%
Greece -2.6% [4] 91.0% [12 ] 2003-2006 2006 2003-  ?
Slovenia -1.9% 29.9%
Sweden +2.2% 47.6%
United Kingdom -4% 44.1% 2006 2007
Denmark +3.9% 30.0%
Cyprus -2.1% 65% [5] 2004-2006 2006 2004-  ?
Malta -2.6% [6] 65.9% [7] 2004-2006 2006 2004-  ?
Estonia +1.4% 3.6%
Latvia -1.0% 11.3%
Lithuania -0.6% 18.9%
Poland -2% 44% 2004- 2007
Hungary -4.9% 59.9% 2004- 2008
Czech Republic -3.2% 31.5% 2004- 2008
Slovakia -3.1% 34.3% 2004- 2007
Romania -2.5% 20.3%
Bulgaria +3.1% 29.9%
Eurozone -2.4% 70.5% 2003- NA
EU27 -2.3% 63.2% 2003- NA


     criteria breach      criteria breach for three consecutive years

See also

Bibliography

  • Matthias Belafi und Roman Maruhn (2005): C·A·P-Position: Ein neuer Stabilitätspakt? Bilanz des Gipfelkompromisses, Centrum für angewandte Politikforschung (German)
  • Anne Brunila, Marco Buti & Daniele Franco,: The Stability and Growth Pact, Palgrave, 2001
  • Peter Bofinger (2003): »The Stability and Growth Pact neglects the policy mix between fiscal and monetary policy«, in: Intereconomics, Review of European Economic Policy, 1, S. 4–7.
  • Daniel Gros (2005): Reforming the Stability Pact, S. 14-17, in: Boonstra, Eijffinger, Gros, Hefeker (2005), Forum: The Stability and Growth Pact in Need of Reform, in: Intereconomics, 40. Jg., Nr. 1, S. 4–21.
  • Friedrich Heinemann (2004): Die strategische Klugheit der Dummheit – keine Flexibilisierung des Stabilitätspaktes ohne Entpolitisierung, S. 62-71, in: Hefeker, Heinemann, Zimmermann (2004), Wirtschaftspolitisches Forum: Braucht die EU einen flexibleren Stabilitätspakt?, in: Zeitschrift für Wirtschaftspolitik, 53. Jahrgang, Heft 1, S. 53–80. (German)

References

  1. ^ Article 99
  2. ^ Article 104
  3. ^ Banco De Portugal Article - English
  4. ^ Guardian Unlimited article
  5. ^ Grauwe, Paul De. Economics of monetary union. Oxford: Oxford UP, 2005. Print
  6. ^ Milton Friedman and the Euro, Cato Institute, 2008
  7. ^ "The Commissioners - Profiles, Portfolios and Homepages". The European Commission. http://ec.europa.eu/archives/commission_1999_2004/index_en.htm. Retrieved 2007-03-21.  
  8. ^ BBC News article
  9. ^ Speech by José Manuel González-Páramo
  10. ^ Senior Nello, Susan, The European Union: Economics, Policies and History, 2nd ed. (McGraw-Hill: New York, NY, 2009), p. 250.
  11. ^ Spring summit of EU leaders - presidency conclusions (Annex II - p.21-39 on stability pact)
  12. ^ Public finances in EMU - 2008, Page 224.

External links

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