Stability and Growth Pact

Stability and Growth Pact in Europe

Description of Stability and Growth Pact

The Concise Encyclopedia of the European Union describes stability and growth pact in the following terms: [1] The Stability and Growth Pact (originally the ‘Stability Pact’) is the outcome of Germany’s determination to ensure that the euro would be permanently underpinned by sound government finances. During the negotiations over the selection of participants for the single currency, Germany feared that some member states (especially the southern Mediterranean ones) might meet the Maastricht Treaty’s ‘convergence criteria’ on the set date but might relapse into fiscal indiscipline after they had been granted entry. The Treaty already contained long-term provisions to prevent ‘excessive deficits’. Germany wished to stiffen these and incorporate them into a Stability Pact. Europe, however, was in recession and France was anxious to water down the Pact so as not to exacerbate an already alarming unemployment crisis. As a face-saving compromise, it was agreed by the European Council at Amsterdam in 1997 that a resolution calling for employment-friendly policies should be issued simultaneously, but the substance of the Pact – to be known now as the ‘Stability and Growth Pact’ – survived unchanged.

The agreement requires member states to submit medium-term ‘stability programmes’ to the Council and the Commission. Countries not participating in the single currency are bound only by the Treaty obligation to ‘endeavour’ to avoid excessive deficits. But within the eurozone the penalties for financial transgression are severe (see more in this European encyclopedia). If a participating state’s budget deficit exceeds 3% of GDP, it must lodge a non-interest-bearing deposit with the Commission on a sliding scale up to a maximum of 0.5% of GDP. The deposit is forfeit if the deficit is not rectified within two years. If a country’s debt exceeds 60% of GDP, it is liable to a fixed penalty of 2% of GDP. In both cases, there are escape clauses: the penalties would normally be waived for a state undergoing a serious recession (defined as a 2% drop in GDP) or making ‘significant progress’ towards correcting an excess – the latter concession being crucial for Italy and Belgium, which both have government debt considerably in excess of 100% of GDP. In 1999, the eurozone countries agreed voluntarily to reduce their target deficit to 2%, although an exception had again to be made for Italy, which was forecasting a 2.4% deficit.

The size of the potential penalties, which have to be approved by a two-thirds majority of the eurozone countries, gives rise to doubt whether they would ever in practice be levied. For example, if Italy were to be deemed in breach of both its limits, it could face fines of over $20 billion.

Resources

Notas y References

  1. Based on the book “A Concise Encyclopedia of the European Union from Aachen to Zollverein”, by Rodney Leach (Profile Books; London)

See Also

Leave a Comment