The Stability and Growth pPact

The SGP itself consists of 3 components: i) 2 European Council regulations (1466 and 1467/97); ii) a resolution/directive (17/6/97, #26); and iii) an opinion of the monetary committee (“Opinion on the content and format of stability and convergence programmeprograms”, 12 October, 1998). The pact consists of the two Council regul

The last component of the pact consists of an opinion given by the Monetary Committee during 1998 and endorsed by Ecofin in October of the same year. The opinion essentially gave the “medium term” adjustment to budgetary positions close to balance or in surplus a timeline, specifying that by the end of 2002 the adjustment should be complete ( - this deadline has been extended to 2005), and also that the assessment of completion of the adjustment should take into account the business cycle and therefore the cyclically- adjusted (or structural) budgetary position.

The recent problems with the SGP can be easily explained by elementary public debt dynamics. As the key indicator in the SGP is the budget deficit to GDP ratio, clearly a reduction in this ratio is achieved if either GDP increases, or if the budget deficit decreasesreduces. But one particular feature of the criteria used in the SGP was the cyclical nature of the budget deficits – in booms they automatically fall, and in recessions, they automatically rise ( - these components are called “automatic stabilizers”). Manyuch of the recent problems with the SGP stem from the fact that EU growth has slowed substantially (constant or falling denominator), leading to automatic stabilizers giving rise to growth in budget deficits (risinghigher numerator). This problem would have been mootute if measures of the budget deficit (called cyclically adjusted or structural measures) that took the stage of the business cycle into account were the focus of attention in the original Maastricht Treaty, but this was not the case ( - even though the Commission has now been told to put more emphasis on these measures when reporting its assessment).

The second concern (Crowley, 2002) relates to the political ramifications of the SGP. This has already been a concern after the Commission’s “early warning” pronouncements on the fiscal policies of Germany, France, Italy and Portugal, and the decision by the French government to effectively ignore the pact. In this regard the pact represents a potential for conflict between member states and between member states and the Commission. In particular, a scenario where an anti-EU party became the ruling party in a member state might cause an unnecessary crisis if the member state then refused to obey the strictures of the SGP. Even if penalties or fines were then implemented to protect the credibility of the pact, the framework under which this might happen is not

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