The Stability and Growth Pact: Pros and Cons
The Stability and Growth Pact: Pros and Cons
1. Introduction
Adopted in 1997, the Stability and Growth Pact (SGP) of the European Union (EU) has been subject to myriad criticisms, which have questioned its effectiveness and sustainability. This paper starts by describing the rationale behind its origination. Section 3 communicates its structure. Section 4 examines the reasons for its reform. Section 5 presents the main leverages and handicaps associated with its implementation. Section 6 concludes. This paper studies how well the SGP fulfills the role of a mechanism that regulates individual fiscal systems of the Member States, as a means of fortifying the European Monetary Union (EMU).
2. Raison d’être
According to Buti and Sapir (2006), Europe experienced two contrasting phases: Golden Age (1945-1973), public finance phase; a theory by Musgrave and the consecutive thirty years (1973-2005), public choice phase, a theory by Buchanan.
During the Golden Age, growth, stability and social unification flourished the region. In the next thirty years, however, growth slowed down, and unemployment rates increased. Escalating public expenditures and large budget deficits caused debt accumulations.
The Maastricht fiscal consolidation process was initiated in 1993 to stop the further deterioration of region’s public finances; however, as the EU started using a single currency with a common monetary policy in 1999, the individual fiscal policies of each Member States were still governed on a national level.
The EU put forward strict prerequisites that members had to deliver in order to be a part of EMU. The outcome of not complying with EU’s exigencies would be exclusion from Eurozone, which no country desired. This partly explains why the fiscal circumstances improved in every single country prior to access to the euro area (Fingland and Bailey, 2008).
The final solution taken by the EU was to
1. Introduction
Adopted in 1997, the Stability and Growth Pact (SGP) of the European Union (EU) has been subject to myriad criticisms, which have questioned its effectiveness and sustainability. This paper starts by describing the rationale behind its origination. Section 3 communicates its structure. Section 4 examines the reasons for its reform. Section 5 presents the main leverages and handicaps associated with its implementation. Section 6 concludes. This paper studies how well the SGP fulfills the role of a mechanism that regulates individual fiscal systems of the Member States, as a means of fortifying the European Monetary Union (EMU).
2. Raison d’être
According to Buti and Sapir (2006), Europe experienced two contrasting phases: Golden Age (1945-1973), public finance phase; a theory by Musgrave and the consecutive thirty years (1973-2005), public choice phase, a theory by Buchanan.
During the Golden Age, growth, stability and social unification flourished the region. In the next thirty years, however, growth slowed down, and unemployment rates increased. Escalating public expenditures and large budget deficits caused debt accumulations.
The Maastricht fiscal consolidation process was initiated in 1993 to stop the further deterioration of region’s public finances; however, as the EU started using a single currency with a common monetary policy in 1999, the individual fiscal policies of each Member States were still governed on a national level.
The EU put forward strict prerequisites that members had to deliver in order to be a part of EMU. The outcome of not complying with EU’s exigencies would be exclusion from Eurozone, which no country desired. This partly explains why the fiscal circumstances improved in every single country prior to access to the euro area (Fingland and Bailey, 2008).
The final solution taken by the EU was to
References: - Annett, A., Decressin J. and Deppler M., 2005, “Reforming the Stability and Growth Pact”, IMF Policy Discussion Paper PDP/05/02 (Washington: International Monetary Fund) - Morris, R., Ongena H - European Economy: Annual Report on the Euro Area 2007, 2007, European Commission, No.5 - The Stability and Growth Pact: A Discussion Paper, 2004, HM Treasury - European Economy: Annual Report on the Euro area 2006, 2006, European Commission, Special Report No.3