Stability and Growth Pact (SGP)

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The End of the Stability and Growth Pact?

The End of the Stability and Growth Pact?

current rules are partly based on a non-binding resolution is an important weakness of the SGP. Any new non-binding rules, like those referred to in the previous paragraph, are probably as easily put aside as those currently in existence. In the view of the Commission, a pro-cyclical loosening of the budget in good times should be viewed as a violation of budgetary requirements under Community law, and should lead to an appropriate and timely response through the use of the available instruments. The Council did not go as far as that and considered that “[P]ro-cyclical budget policies in good times have been one of the major flaws in the implementation of the Stability and Growth Pact in the past, in particular in countries that had not reached the close to balance or in surplus position. Automatic stabilisers should operate symmetrically over the cycle and, to this end, member states shall avoid pro-cyclical policies, especially when growth conditions are favourable. To ensure this, all existing procedures should be used to the fullest.” 28
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The end of stability and growth pact?

The end of stability and growth pact?

current rules are partly based on a non-binding resolution is an important weakness of the SGP. Any new non-binding rules, like those referred to in the previous paragraph, are probably as easily put aside as those currently in existence. In the view of the Commission, a pro-cyclical loosening of the budget in good times should be viewed as a violation of budgetary requirements under Community law, and should lead to an appropriate and timely response through the use of the available instruments. The Council did not go as far as that and considered that “[P]ro-cyclical budget policies in good times have been one of the major flaws in the implementation of the Stability and Growth Pact in the past, in particular in countries that had not reached the close to balance or in surplus position. Automatic stabilisers should operate symmetrically over the cycle and, to this end, member states shall avoid pro-cyclical policies, especially when growth conditions are favourable. To ensure this, all existing procedures should be used to the fullest.” 28
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Italy and the Stability and Growth Pact

Italy and the Stability and Growth Pact

Italy’s debt problem is not a new one; for more than ten years the state have had a gross government debt over 100% of GDP. Italy entered the third stage of the Economic and Monetary Union (EMU) in 1998 without managing the debt criteria from the Maastricht treaty. Around the same time the state signed the Stability and Growth Pact (SGP) and promised to follow its regulations and procedures to keep a stable monetary union. The fact that Italy entered into the union without fulfilling all criteria necessary made me curious to see how they have been doing economically in regard to the regulations and procedures of the SGP. That is the reason why I chose Italy as the state in focus of this paper. The SGP was reformed in 2005 due to both external and internal criticism. I wanted to see the changes and their impact on how states are evaluated regarding excessive deficit.
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The Stability and Growth Pact Time to Rebuild!

The Stability and Growth Pact Time to Rebuild!

1 Introduction With the launch of the third stage EMU the member countries have embarqued to unknown territory to tighten the political vision of a common European future. Once more the economic momentum served as a vehicle to link irreversibly the fate of the member countries as it was from the outset of the union after WWII. As a consequence the twelve member states had to rethink and rebuild a new common European macroeconomic architecture that enshrined the views on monetary and fiscal policy interaction in the euro area. Unfortunately, the grandfathers of the Stability and Growth Pact (SGP) were not ignited by the challenge to restructure but mostly guided by cautioness, or put differently the new architecture- The Stability and Growth Pact- is a child of German “Angst”. Given the current problems and shortcomings of the SGP it is time to rethink and rebuild.
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Discipline and Flexibility - The Stability and Growth Pact

Discipline and Flexibility - The Stability and Growth Pact

Beginning with the Commission recommendation issued on February 27 th 2015 France is, on the basis of the implementation of growth-enhancing structural reforms, granted the possibility to deviate from the set out targets. This is due to the communication on “Making the best use of the flexibility within the existing rules of the Stability and Growth Pact”. The Commission and the Council have since the issuing of the aforementioned communication added the factor of attempts at structural reform when assessing whether disciplinary action is to be taken towards a Member State that does not meet the debt and deficit criteria. This creating a stronger basis for fiscal flexibility within the SGP framework.
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Stability (and Growth) Pact and Monetary Policy.

Stability (and Growth) Pact and Monetary Policy.

Jean-Paul Fitoussi The ECB and the Stability and Growth Pact The ECB has a very clear idea of what European governments should do in the name of ‘sound’ economic management: balance the budget, reduce the role of the state in the economy by cutting public expenditures; increase the flexibility of labour markets by shrinking the welfare state (see for example the ECB’s Monthly Bulletin April 2002), and increase competition in both product and labour markets. Structural reforms mean, in particular, reducing employment protection and the generosity of the system of unemployment benefits. It is expected that such a comprehensive policy framework will lead to an increase in work’s incentives (lower taxes allowed by the decrease in public expenditure, and lower unemployment benefits), higher growth and lower inflation pressures (through the increase in the intensity of competition). This conception of the policy mix in a broad sense is fully mainstream, which is also fully normal, as nobody would expect that a central bank hold explicitly an heterodox position. It is thus utterly normal that the ECB take an active role in the budgetary debate, especially if this debate leans towards a possible reform of the SGP, which may be interpreted by the Bank as a reduction in the degree of cooperation from National States. The Stability and Growth Pact has indeed been designed also as an instrument to enforce the cooperation of European governments towards the aim of the ECB, namely price stability.
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How reliable are the statistics for the Stability and Growth Pact?

How reliable are the statistics for the Stability and Growth Pact?

26 available information is not perfect and subject to revision. However, given that fiscal surveillance in the EU is primarily based on the evolution of specific indicators and the respect of specific ceilings or targets, it is necessary to take those errors explicitly into account. This means that those that decide on the SGP-related procedure must be aware that fiscal statistics are susceptible to relatively large revisions until very late and that the size of these revisions differs from country to country. Although the Commission cannot predict how reported data will be revised, it would be useful for it to make explicit what the uncertainty margins surrounding the headline figures are each time important steps in the SGP are taken. In some cases, it may make sense to postpone the abrogation of a procedure when the deficit ratio falls to below 3% of GDP, but remains so close to it that there is a significant risk that the deficit will have to be revised to above the reference value at a later stage, in particular if some other indicators suggest that an upward revision is likely. This proposal is consistent with the reformed Stability and Growth Pact, which puts the emphasis on durable consolidations.
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Pension Systems, Ageing and the Stability and Growth Pact

Pension Systems, Ageing and the Stability and Growth Pact

While monetary policy in the euro area is delegated to the ECB, fiscal policy remains in the hands of the national authorities. They should, however, according to the Treaty agreed in Maastricht in 1991, comply with the principle of sound public finances. To ensure this the Treaty prohibits central bank financing to governments, their privileged access to other financial institutions and the bail-out of debts of any public entity with the help of the European Community or its Member States. A bail-out of a Member State in severe budgetary trouble by raising inflation to erode the real burden of its debt servicing costs was also excluded by setting price stability as the primary objective of the ECB. This arsenal of protection measures was still complemented by laying out an Excessive Deficit Procedure (EDP) with reference values for deficits (3% of GDP) and debt (60% of GDP). Yet, some countries believed that all this would still not be sufficient guarantee for the ECB to be able to operate independently and achieve price stability. This fear led the German Finance Minister at the time to come up with a proposal for a so-called Stability Pact that would lead to automatic financial punishments for countries with excessive deficits. However, the eventual agreement was coined the "Stability and Growth Pact" to reflect the view of some Member States (in particular, France) that the task of the EU fiscal framework was also to stimulate economic activity. Moreover, the automatic fines were replaced by a complex procedure of increasing severity of punishments that would only in the end lead to the payment of fines (see Eichengreen and Wyplosz, 1998, for a more detailed discussion on the SGP and its rationales).
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Should Europe Get Rid of the Stability and Growth Pact?

Should Europe Get Rid of the Stability and Growth Pact?

in 2002. Both governments are likely to breach the SGP for a third time in 2004: the German government is campaigning for a €16 billion tax cut in 2004. France is not thinking of abiding by the fiscal rule before 2005. Germany in Dublin pushed towards the adoption of a fiscal rule called: "The Stability Pact." The wording was not appropriate for France: budget deficit is often synonymous of growth. Calling for a budget stability would be unpopular. The French in Amsterdam agreed on "The Stability and Growth Pact", insisting on the need for a fiscal rule but not at the expenses of growth. It is thus not surprising that in 2003, the French Prime Minister defended the tax-cut plan in order to give an impulse to the French growth although breaching the deficit rule.
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Public Debt and the Future of the EU's Stability and Growth Pact

Public Debt and the Future of the EU's Stability and Growth Pact

Monetary policy and fiscal policy are connected in various ways. This is why the adoption of the Euro as a common European currency has been accompanied by the setup of the European Union’s Stability and Growth Pact, a framework for the coordination of the EU countries’ fiscal policies. In this paper, we provide a short overview of the SGP’s history of origins and the degree to which the EU Member States adhered to it. Further, we analyse what effects public debt and public deficits have and whether, after all, public debt should be limited in one way or the other. Along these lines, the case for budgetary policy coordination in the special context of the Economic and Monetary Union is presented. After looking at the current SGP framework, we shed light on its main shortcomings and present various reform proposals, all of which are critically questioned. Finally, we present a case for a more flexible country-by-country approach to the interpretation of the deficit criterion (based on some simple algebra).
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Implementing the stability and growth pact: enforcement and procedural flexibility

Implementing the stability and growth pact: enforcement and procedural flexibility

Abstract The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays.
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Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance

Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance

2. The Stability Pact: Institutional Features and the Theoretical Debate. Countries joining the euro were in need for a set of rules aimed at permanently guaranteeing the soundness of fiscal policy. In fact, the criteria set by the Maastricht Treaty only represented a requirement for entry in the EMU, and nothing in principle prevented countries from abandoning fiscal discipline once admitted to the single currency club. The Amsterdam Treaty (1997), better known as the Stability and Growth Pact (SGP) complements the Maastricht Treaty, in that its main objective is to make permanent the requirements for public finance soundness, and to increase transparency. According to the Treaty, each year member countries have to present a "Stability and Convergence Programme", to be examined by the European Commission and the Council. The programmes provide a medium-term objective for the budgetary position of close to balance or in surplus, together with the adjustment path towards the objective. Furthermore, the programmes give the main assumptions about expected economic developments together with description of budgetary and other economic policy measures being taken and/or proposed to achieve the objectives.
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"Reforming the Stability and Growth Pact: Size and Influence in EMU Policymaking"

"Reforming the Stability and Growth Pact: Size and Influence in EMU Policymaking"

favorable to these larger states, they will continue to breach the SGP unless it is reformed to accommodate their interests and deal with all of the states more flexibly. The Logic of the Stability and Growth Pact: Questioning the Strength of the Consensus The Maastricht Treaty outlined plans for monetary union by requiring would-be participants to achieve the convergence criteria in order to ensure that the Eurozone would be comprised of economies that would not threaten Germany’s price stability. By the late 1980s, monetary politics in the EC followed the lead of West Germany, whose currency formed the unofficial anchor of the system. Ideas regarding the long-term trade- off between inflation and unemployment were replaced by a consensus on the need for low inflation in order to be able to keep interest rates low, thus spurring economic growth (McNamara 1998). The Maastricht Treaty thus demanded convergence in inflation, exchange rates, interest rates, debts and deficits for the participants, though countries could be approaching the required levels and still be admitted to EMU, so long as the other Member States agreed (as was the case for Italy and Belgium). The pursuit of economic growth through an independent central bank and fiscal policies that would limit the ability of governments to intervene in the economy reflect the neoliberal consensus that prevailed in the 1990s (Fitoussi and Saraceno 2004).
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The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe

The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe

I. Introduction The completion of EMU in Europe, with the introduction of the single currency – the euro- in 1999 has greatly affected the conduct of economic policy in the twelve participating member states. The only traditional short-term macroeconomic instrument that remains in the control of national authorities is fiscal policy. Consequently, fiscal policy has gained new responsibilities with EMU, but at the same time the Stability and Growth Pact (SGP) constrains it operation. Fiscal policy must now provide output smoothing, especially the smoothing of asymmetric shocks, and contribute to attaining price stability and external balance. These new objectives are particularly important for the case of small countries out of synchrony with the rest of the monetary union and require a flexible fiscal policy. This paper therefore aims at evaluating the actual cyclical properties of discretionary fiscal policy.
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The Stability and Growth Pact from the Perspective of the New Member States

The Stability and Growth Pact from the Perspective of the New Member States

II. The Stability and Growth Pact 1. Features The SGP and its rules are well known and well documented and we briefly recall only its main features and the rationale behind them 3 . A unique feature of the euro zone is that monetary policy is centralized in the hands of the European Central Bank (ECB) while fiscal policy remains decentralized in the hands of the governments of the individual member states. It was therefore recognized that to support the ECB’s responsibility to maintain price stability and to prevent free- riding, fiscal policy had to be subject to rules in order to ensure discipline of public finances. These rules consist of two pillars. First, a Members State’s general government deficit/GDP ratio cannot exceed 3 percent and its general government debt/GDP ratio cannot exceed 60 percent; in case the latter ratio is exceeded, the country has to demonstrate that its debt is being reduced and approaching the reference value at a satisfactory pace. Second, Member States
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The “New” Stability and Growth Pact: More Flexible, Less Stupid?

The “New” Stability and Growth Pact: More Flexible, Less Stupid?

Abstract Since the beginning of the European single currency project, the adoption of fiscal binding rules, restraining the use of the single policy instrument left for national authorities, has been challenged by many authors and politicians. The discussion has been rekindled in recent years, following a period of economic recession or stagnation in several Member-Countries and some criticisms linking the Stability and Growth Pact (SGP) to the general economic situation.

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The stability and growth pact : an eventful history

The stability and growth pact : an eventful history

5. Conclusion This article has explained why, in a monetary union with a fragmented fi scal policy, clear and strictly applied budgetary rules are even more necessary than in other circumstances. With the stability and growth pact, which was introduced primarily at the instigation of Germany and certain smaller Member States, the institutional architecture of EMU was therefore enhanced with an instrument that should offer the necessary guarantees for a permanent budgetary stability in the union. It limited the Council’s scope for interpretation in the event of inap- propriate budgetary developments in favour of strict rules and procedures and constituted a decent compromise between the various criteria which good budgetary rules must satisfy. If correctly applied, the pact was fl exible enough, for instance, to absorb normal cyclical fl uctua- tions via the operation of the automatic stabilisers.
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The Stability and Growth Pact - crisis and reform

The Stability and Growth Pact - crisis and reform

When it came to implementing the Stability and Growth Pact in a rigorous manner, the fi rst test was failed. Faced with a need to fully apply the provisions of the corrective arm of the Pact in the autumn of 2003, France and Germany, among others, blocked its strict implementation by colluding in order to reject a Commission recommendation to move a step further in the direction of sanctions under the excessive defi cit procedure. The Commission, with the support of governments and academics, responded by proposing a reform of the Stability and Growth Pact (Fischer et al., 2006). This aimed to increase countries’ ownership of the process by having them defi ne their own country- specifi c medium-term objectives for fi scal balances. But otherwise, the reform, which was agreed in early 2005, introduced greater discretion, leniency and political control into
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Explaining Instability in the Stability and Growth Pact

Explaining Instability in the Stability and Growth Pact

The Maastricht Treaty set guidelines for what macro-economic goals European Union Member States would need to reach to qualify for participation in the coming common currency, with deficit and debt targets the most visible. Initially, the expectation was that only a few countries would be able to participate. When it became clear that there would be an expanded Eurozone, which would include not only core countries like Germany and France but more peripheral countries like Spain and even Greece that had traditionally run large budget deficits, there was growing concern that European-level rules were needed. Otherwise some governments would be tempted to run fiscal policies that could become unsustainable and leave the other Member States with the unpalatable choice of either bailing out the troubled government or letting it suffer from the consequences of a default. The Member State governments therefore agreed to a Stability and Growth Pact meant to avoid this outcome. Clearly, the need for financial packages for multiple Member States during the euro crisis means the Pact failed. This paper explores why the Pact failed, and it focuses especially on its institutional design.
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Pension Systems, Ageing and the Stability and Growth Pact

Pension Systems, Ageing and the Stability and Growth Pact

3. The Stability and Growth Pact While monetary policy in the euro area is delegated to the ECB, fiscal policy remains in the hands of the national authorities. They should, however, according to the Treaty agreed in Maastricht in 1991, comply with the principle of sound public finances. To ensure this the Treaty prohibits central bank financing to governments, their privileged access to other financial institutions and the bail-out of debts of any public entity with the help of the European Community or its Member States. A bail-out of a Member State in severe budgetary trouble by raising inflation to erode the real burden of its debt servicing costs was also excluded by setting price stability as the primary objective of the ECB. This arsenal of protection measures was still complemented by laying out an Excessive Deficit Procedure (EDP) with reference values for deficits (3% of GDP) and debt (60% of GDP). Yet, some countries believed that all this would still not be sufficient guarantee for the ECB to be able to operate independently and achieve price stability.
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