The Economic Rationale behind the Stability and Growth Pact When the Euro was Launched
What was the economic rationale for the implementation of the Stability and Growth Pact (SPG) when the single currency was launched? To what extent is the SGP now redundant?
The Maastricht Treaty of the European Union signed in 1992, established a set of convergence criteria which had to be met by each Member State before it could adopt the Euro. This was to ensure that economic development within the Economic and Monetary Union (EMU) is balanced so that all Member States joining the Euro entered on the basis of similar economic conditions and sound public finances.1 Thus, the Stability and Growth Pact (SGP) ensures EU Member states continue to observe the Maastricht convergence criteria. Adopted by the euro zone in 1997, the SGP was a political agreement that was set up to enforce budgetary discipline of the Member States, after the Euro was launched as part of the third stage of Economic and Monetary Union (EMU). It was designed to contribute to the overall climate of monetary stability and financial prudence to ensure the long term success of EMU. 2
It is widely held view, particularly in the current state of affairs that governments are more inclined to spend than they can afford, thereby forcing future generations to burden this spending via higher taxes and resulting in so called “deficit bias” of national budgetary policies. The ageing population of EU, in which its citizen have generally led more active and healthy lifestyles, has resulted in people living longer. This has also had a significant impact of growth and contributed to strong pressures to increase public spending. Thus, continuous high deficits and excessive debt levels by governments have been a cause for concern, leading to greater expectations of inflationary pressures and consequently higher interest rates which may endanger the economic growth, welfare and financial sustainability of the economy. In particular, larger deficits induce a greater need for government financing through
The Maastricht Treaty of the European Union signed in 1992, established a set of convergence criteria which had to be met by each Member State before it could adopt the Euro. This was to ensure that economic development within the Economic and Monetary Union (EMU) is balanced so that all Member States joining the Euro entered on the basis of similar economic conditions and sound public finances.1 Thus, the Stability and Growth Pact (SGP) ensures EU Member states continue to observe the Maastricht convergence criteria. Adopted by the euro zone in 1997, the SGP was a political agreement that was set up to enforce budgetary discipline of the Member States, after the Euro was launched as part of the third stage of Economic and Monetary Union (EMU). It was designed to contribute to the overall climate of monetary stability and financial prudence to ensure the long term success of EMU. 2
It is widely held view, particularly in the current state of affairs that governments are more inclined to spend than they can afford, thereby forcing future generations to burden this spending via higher taxes and resulting in so called “deficit bias” of national budgetary policies. The ageing population of EU, in which its citizen have generally led more active and healthy lifestyles, has resulted in people living longer. This has also had a significant impact of growth and contributed to strong pressures to increase public spending. Thus, continuous high deficits and excessive debt levels by governments have been a cause for concern, leading to greater expectations of inflationary pressures and consequently higher interest rates which may endanger the economic growth, welfare and financial sustainability of the economy. In particular, larger deficits induce a greater need for government financing through
References: 2 EurActiv. (2004). Stability and Growth Pact. Available: http://www.euractiv.com/en/euro/stability-growth-pact/article-133199. Last accessed 8 Jan 2010. 5 European Commission: Economic and Financial Affairs. (2009 last updated). Stability and Growth Pact. Available: http://ec.europa.eu/economy_finance/sgp/index_en.htm. Last accessed 14 Jan 2010. 6 Eu Legislation 9 Unknown Author. (2006). The Stability and Growth Pact. Available: http://www.eurointelligence.com/article.581+M5283fb3c5b0.0.html. Last accessed 28 Feb 2010. 10 Drs 11 José Manuel González-Páramo, Member of the Executive Board of the ECB. (2005 ). The reform of the Stability and Growth Pact: an assessment. Available: http://www.ecb.int/press/key/date/2005/html/sp051013.en.html. Last accessed 28 Feb 2010. 12 Marco Bassetto AND Vadym Lepetyuk . (2007). Government Investment and the European Stability and Growth Pact Pact: an assessment. Available: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012864. Last accessed 28 Feb 2010. 13 Unknown Author. (2005). International Monetary Cooperation. Available: http://www.nationalbanken.dk/DNUK/Publications.nsf/d8a9f2b39990e07880256a3e004157b5/1aef3c34731a4a55c1257137004fd1dc/$FILE/kap09.htm. Last accessed 28 Feb 2010. 14 Ana Sabic. (2006). Reform of the Stability and Growth Pact. Financial Theory and Practise. 30 (3), 283-293. 15 Jim Brunsden 16 Unknown Author. (2009). For now, though not for ever. Available: http://www.europeanvoice.com/article/imported/for-now,-though-not-for-ever/66732.aspx. Last accessed 28 Feb 2010. 17 Wolfgang Münchau 18 Carlo Bastasin. (2009). Another Greek Lesson: As Always Hard But Inspiring. Available: http://www.piie.com/realtime/?p=1101. Last accessed 28 Feb 2010. 19 Jim Brunsden 20 Jeb Golinkin. (2010). Bailing Out Greece is Just the Start. Available: http://www.frumforum.com/bailing-out-greece-is-just-the-start. Last accessed 28 Feb 2010.