Stability and Growth Pact

Topics: European Union, Monetary policy, Macroeconomics Pages: 6 (2283 words) Published: May 16, 2012
Q: Why was the Stability and Growth Pact introduced, and what were the reasons for its failure?
A: Since the beginning of monetary integration ideologies throughout European member states, there have been numerous movements which have contributed to the state of Economic Monetary Union the EU finds itself in today: with a single currency, a single market and competing with the American Dollar. One of the contributing movements which helped build towards greater monetary integration, was the Stability and Growth Pact (SGP). Growing from the Maastricht Treaty (1992), it was introduced mainly to insure that member states maintained budgetary discipline after the introduction of the single currency. It built upon criteria that was agreed in the Maastricht Treaty, and was agreed and formed in the Amsterdam Council meeting (1997). This essay will firstly address some of the former monetary integration ideologies, and give a brief history of the movements which lead to Economic Monetary Union (EMU) within member states. Then it will give a short indication and description of how the Stability and Growth Pact works. It will also discuss why it was introduced, and some of the reasons for its so called “failure”. It is necessary to have a brief understanding of the history of ideologies of integration which lead to the formation of the introduction of the Stability and Growth Pact. One of the first philosophies of monetary integration came from Raymond Barre, the EC commissioner of 1969. It is referred to as the Barre Report (1969). In his report, Barre proposed greater co-ordination of economic policies and closer monetary integration within member states at the time. From this the Heads of States and governments decided to make economic and monetary union and official goal of European integration. The next important viewpoint of monetary integration is from Pierre Werner, the Luxembourg Prime Minister of 1970. It is officially known as the Werner Report (1970). Werner Proposed to co-ordinate the economic policy of the then six member countries better, and to create a system of fixed parities and finally a common currency. It officially set out to do this in three steps, by 1980. However it failed, as they overlooked, or took for granted, the effects of a fixed exchange rate against the American Dollar would affect it. Another important movement towards monetary integration was the introduction of the Economic Monetary System (1979). According to ( it was “was built on the concept of stable but adjustable exchange rates”, and controlled currency fluctuations within a band of ±2.25%. The final past viewpoint of monetary integration is the Delors Report (1989). Put forward by the then President of the Commission, Jacques Delors, it defined the monetary union objective as a complete liberalization of capital movements, full integration of financial markets and the possible replacement of national currencies with a single currency. He set out to achieve this in 3 steps, which leads on to the formation of the Maastricht treaty and the movements towards Economic Monetary Union. There were certain factors which made the creation of the Stability and Growth pact necessary. The Maastricht Treaty (1992) defined a precise transition towards Economic Monetary Union. Three stages of monetary integration were defined. Stage one concentrated on the abolishment of all remaining capital controls. Stage two concentrated on the creation of the Economic Monetary Institute, which main goals were to strengthen monetary co-operation and to make preparations required for the establishment of the European Central Bank (ECB), for the conduct of a single monetary policy. The third stages introduced the Convergence Criteria, where by countries had to meet certain criteria in order to join the single currency. The criteria focused on price stability, sustainable fiscal position, exchange rate stability and low interest rates. The specifics of...
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