Stability and Growth Pact
Encyclopedia
The Stability and Growth Pact (SGP) is an agreement among the 27 Member states of the European Union that take part in the Eurozone
, to facilitate and maintain the stability of the Economic and Monetary Union
. Based primarily on Articles 121 and 126 of the Treaty on the Functioning of the European Union, it consists of fiscal monitoring of members by the European Commission
and the Council of Ministers
and, after multiple warnings, sanctions against offending members.
The pact was adopted in 1997, 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:
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.
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) Romano Prodi
described it as "stupid", 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 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. The pact has been further watered down in 2005 to waive France's and Germany's violations.
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.
The pact is part of a set of Council Regulations, decided upon the European Council Summit 22–23 March 2005.
Reform 2011
In March 2011, following the 2010 European sovereign debt crisis
, the EU member states adopted a new reform under the Open Method of Coordination
, aiming at straightening the rules e.g. by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. The new Euro Plus Pact
is designed as a more stringent successor to the Stability and Growth Pact, which has not been implemented consistently. The measures are controversial not only because of the closed way in which it was developed but also for the goals that it postulates.
The four broad strategic goals are:
An additional fifth issue is:
and non-Eurozone EU member states. Data in the table are for the year 2010 from the European Commission's report "Public Finances in EMU 2011"
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
, to facilitate and maintain the stability of the Economic and Monetary Union
Economic and Monetary Union of the European Union
The Economic and Monetary Union is an umbrella term for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone.All member states of the...
. Based primarily on Articles 121 and 126 of the Treaty on the Functioning of the European Union, it consists of fiscal monitoring of members by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
and the Council of Ministers
Council of the European Union
The Council of the European Union is the institution in the legislature of the European Union representing the executives of member states, the other legislative body being the European Parliament. The Council is composed of twenty-seven national ministers...
and, after multiple warnings, sanctions against offending members.
The pact was adopted in 1997, so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria
Convergence criteria
The euro convergence criteria are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union and adopt the euro as their currency...
, 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.
Criticism
The Pact has been criticised by some 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; economist Antonio Martino 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."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
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
President (1999–2004) Romano Prodi
Romano Prodi
Romano Prodi is an Italian politician and statesman. He served as the Prime Minister of Italy, from 17 May 1996 to 21 October 1998 and from 17 May 2006 to 8 May 2008...
described it as "stupid", 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 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. The pact has been further watered down in 2005 to waive France's and Germany's violations.
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.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.
The pact is part of a set of Council Regulations, decided upon the European Council Summit 22–23 March 2005.
Reform 2011
In March 2011, following the 2010 European sovereign debt crisis
2010 European sovereign debt crisis
From late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter.....
, the EU member states adopted a new reform under the Open Method of Coordination
Open Method of Coordination
The open method of coordination is a relatively new and intergovernmental means of governance in the European Union, based on the voluntary cooperation of its member states.- Overview :...
, aiming at straightening the rules e.g. by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. The new Euro Plus Pact
Euro Plus Pact
The Euro-Plus Pact, also initially called the Competitiveness Pact or later the Pact for the Euro, is a 2011 plan in which the member states of the European Union make concrete commitments to a list of political reforms which are intended to improve the fiscal strength and competitiveness of each...
is designed as a more stringent successor to the Stability and Growth Pact, which has not been implemented consistently. The measures are controversial not only because of the closed way in which it was developed but also for the goals that it postulates.
The four broad strategic goals are:
- fostering competitiveness
- fostering employment
- contributing to the sustainability of public finances
- reinforcing financial stability.
An additional fifth issue is:
- tax policy coordination
Member states by SGP criteria
The deficit criterion is applied to both EurozoneEurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
and non-Eurozone EU member states. Data in the table are for the year 2010 from the European Commission's report "Public Finances in EMU 2011"
| criteria breach | criteria breach for three consecutive years |
| 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 Government debt Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government... to GDP |
|||||
| Reference value | min. −3% | max. 60% | ||||
| −4.6% | 72.3% | 1995–1997; 2009− | ? | 2003– | ? | |
| −4.1% | 96.5% | 2009− | ? | 2003– | ? | |
| −3.2% | 16.2% | 2009− | ? | |||
| −5.3% | 60.8% | 2004–2006; 2009− | ? | 2004– | ? | |
| −3.2% | 35.3% | 2004–2007; 2009− | ? | |||
| −2.7% | 43.6% | 2008 | ||||
| +0.1% | 6.6% | |||||
| −2.5% | 48.4% | |||||
| −7.0% | 81.7% | 2003– | ? | 2003– | ? | |
| −3.3% | 83.2% | 1994; 1996; 2003–2006, 2009− | ? | 2003– | ? | |
| −10.5% | 142.8% | 2003– | ? | 2003– | ? | |
| −4.2% | 80.2 | 2004– | ? | 2007− | ? | |
| −32.4% | 96.2% | 2008− | ? | 2009− | ? | |
| −4.6% | 119% | 2003− | ? | 2003– | ? | |
| −7.7% | 44.7% | 2008− | ? | |||
| −7.1% | 38.2% | 2008− | ? | |||
| −1.7% | 18.4% | |||||
| −3.6% | 68.0% | 2004–2006; 2008− | ? | 2004– | ? | |
| −5.4% | 62.7% | 2004–2005; 2009− | ? | 2009− | ? | |
| −7.9% | 55.0% | 2004– | 2007 | |||
| −9.1% | 93.0% | 2002; 2005– | 2002; 2008 | 2005– | ? | |
| −6.4% | 30.8% | 2008− | ? | |||
| −7.9% | 41.0% | 2004–2006; 2009− | 2007; ? | |||
| −5.6% | 38.0% | 2009− | ? | |||
| −9.2% | 60.1% | 2008− | ? | 2010− | ? | |
| +0.0% | 38.5% | |||||
| −10.4% | 80.0% | 2006− | 2007 | 2009− | ? | |
 European Union EurozoneEurozone The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender... |
−6.0% | 85.5% | 2009– | NA | 2003– | NA |
| −4.7% | 80.2% | 2009– | NA | 2003–2006; 2008− | NA | |
See also
- Convergence criteriaConvergence criteriaThe euro convergence criteria are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union and adopt the euro as their currency...
for joining the EurozoneEurozoneThe eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender... - Fiscal unionFiscal unionFiscal union is the integration of the fiscal policy of nations or states. Under fiscal union decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments...
- Euro Plus PactEuro Plus PactThe Euro-Plus Pact, also initially called the Competitiveness Pact or later the Pact for the Euro, is a 2011 plan in which the member states of the European Union make concrete commitments to a list of political reforms which are intended to improve the fiscal strength and competitiveness of each...
External links
- European Commission, Directorate General for Economic and Financial Affairs. Stability and Growth Pact
- Federal Statistical Office Germany page on General government consolidated gross debt as a percentage of GDP
- Federal Statistical Office Germany page on Share of net borrowing or net lending of general government in the gross domestic product
- Björn Hacker/Till van Treeck: What influence for European governance? The reformed stability and growth pact, the Europe 2020 strategy and the "European Semester", Friedrich-Ebert-Stiftung, December 2010 (PDF 115 KB)