Download the Stability and Growth Pact

European Union
EMU and the Stability and
Growth Pact
What is the Growth and Stability
Pact
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The pact says that
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each EU member state must run a
balanced budget in the medium term
and that no country's deficit should
exceed 3 per cent of GDP.
SGP – did it work
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During the late 1990s the pact worked
well; 11 of the 15 countries used the
proceeds of the economic boom to
eliminate deficits and to pay back
national debt. Countries such as
Greece and Spain now seem models
of fiscal rectitude.
Criticisms of the SGP
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Too rigid
Four countries that failed to tackle structural deficits before the
downturn started - France, Germany, Italy and Portugal - have
borne the brunt. They say the pact is pro-cyclical, forcing them
to cut spending just when their economies need a boost
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But in France's case, the budgetary burden arising from its
ageing population will start increasing rapidly from 2005
onwards, making it even more difficult to get things back into
balance.
In the case of Germany, its rigid wage-setting system
continues to keep the cost of employing people in depressed
regions well above the value of what their work will produce, and
this will keep them on welfare and will keep pushing up the
Government's budget deficit
EU Commission takes action
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In November 2003: France and Germany escaped
the threat of fines for breaking the European
Union's fiscal rules after a proposal to suspend the
sanctions mechanism of the stability and growth
pact was approved by EU finance ministers.
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Last month's decision by the European Commission not to
enforce the rules in the case of France and Germany has
effectively killed off the pact as a coercive instrument and
prompted EU governments to consider a change in the
rules.
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Why is the European Commission taking legal
action now?
Does EU need the SGPact
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Everyone agrees the euro needs a set
of rules to join up national economic
policies.
WHY
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Excessive government borrowing in one
eurozone country could feed inflation and
force up interest rates for everyone
Ahern and the Stability and
Growth Pact
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Mr Ahern said the pact, which limits
borrowing to 3 per cent of GDP, was
designed to control day-to-day spending by
governments. "We have a number of areas
where we need to be able to spend money
on the capital side to deal with these
infrastructural deficits so that we would not
be in a position where it will work against us
to build up economic growth (IT 9.5.03)
SGP’s demise 9( IT 2. 1 04)
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2003 – ‘ the year that saw the destruction of the
Stability and Growth Pact at the hands of France
and Germany, Europe's biggest economies.
2004 is likely to see a debate about reforming the
Stability and Growth Pact that could lead to calls
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for the broadening of the ECB's mandate to include
encouraging economic growth.
At present, the sole purpose of the ECB's monetary policy
is to maintain price stability, which is defined as keeping
inflation below but close to 2 per cent
Ireland 
From rags to riches:
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1987 incomes in Ireland, measured by
GDP per head, were just 63% of Britain’s
Government borrowing was so badly out
of control in the ten years to 1987 that
public debt soared from 65% of national
income to nearly 120%
2003 - Ireland
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GDP increased by 6.9 per cent,
GNP measure, which relates more
directly to the domestic sector,
recorded an increase of just 0.1 per
cent last year, the lowest growth rate
of this variable since the mid-1980s.
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A General Government Deficit of
around 1 per cent of GDP is in
prospect;
The debt/GDP ratio is forecast to
remain broadly stable at 34 percent;
Ireland – economic prospects
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our economic prospects going forward there are a number of
key facts which we have to acknowledge and respond to positively:
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- firstly, we are part of a monetary union where the overriding policy
objective is a low-inflation environment of 2 per cent, or less, per
annum;
— secondly, international competition is exerting downward pressure
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on goods prices and is likely to continue to do so for some time to
come;
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— thirdly, we are one of the most open economies in the world; and
— finally, international competition for jobs and investment is
becoming much more intense all the time.
2012
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There are essentially four key elements of note in the fiscal
treaty:
• The establishment of a ‘Golden Rule’ to ensure budgetary
discipline
• The policing of the Golden Rule at national level through socalled ‘debt brakes’
• The policing of national budgetary control at supranational
level through a stricter
excessive deficit procedure, including legal penalties and
control by the European Court
of Justice
• New institutional architecture for euro area governance
The NUMBERS - 2012
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the Golden Rule and other numerical benchmarks are long-term
objectives given that the vast majority of Member States are
currently not compliant with the Golden Rule and convergence
criteria (see table below). Furthermore, the fiscal treaty allows states
that have ratified its content to deviate from these targets in case of
‘exceptional circumstances’, defined as ‘an unusual event outside the
control’ of a state ‘which has a major impact on the financial position
of the general government’ or in ‘periods of severe economic
downturn’. The exceptional circumstances clause could be claimed
by almost all Member States from the moment the fiscal treaty enters
into force, which nullifies the impact of the numerical benchmarks in
thetreaty.