The Stability and Growth Pact (SGP) is criticized for being harsh on the Member States who have excessive deficits in difficult economic times. However, in the same manner, the Member States themselves have been accused of causing such issues on themselves by not obeying fiscal rules established. In this paper, I will discuss and evaluate the Stability and Growth Pact to determine if it is a beneficial and well-rounded arrangement for the EU or just a failure as a whole. Ultimately, to answer the question of who is to be blamed for the economic situation that some Member States find themselves in.
Before moving forward with the SGP, I will first contextualize the Maastricht Treaty; the roots of the SGP. In 1992, EU Member States agreed and signed the Maastricht Treaty (Treaty of the European Union). The Maastricht Treaty undertook three pillars of impact. The first was an economic policy, which composed of creating a shared economic and monetary union through a central banking system to maintain price stability; to essentially secure the value of the currency. Additionally, this created a path for the creation of the euro by first establishing the free movement of capital amongst the Member States and then advancing to expanding partnership amongst national central banks and a rise of adjustment of economic policy with the Member States. The euro was introduced by the establishment of a singular monetary policy from the European Central Bank; along with criteria for the Member States to meet in order to participate in the euro. It consisted of ensuring that the Member States were stable in inflation, public debt, interest and exchange rates. Hence, government deficit and gross domestic product (GDP) must not exceed 3%, also government debt and GDP must not exceed 60%. The second pillar was a common foreign and security policies. It concerned securing the common values and interests, independence, and integrity of the Union along with the principles of the United Nations Charter; to enlarge security of the Union in order to promote international cooperation, democracy, and respect for human rights and fundamental freedoms. The third pillar concerned justice and home affairs establishing by common intergovernmental methods that concerned controls on crossing the external, combating terrorism, drug trafficking, international fraud, and etc through the creation of a European Police Office (Europol); along with a system for exchanging information between national police forces; providing citizens with a high levels of security.
The Treaty of Amsterdam was an amending the Maastricht Treaty; which put the treaty into more concrete terms. In 1997, Member States agreed to Article 104 of the Maastricht Treaty, in which “member states are obligated to avoid excessive deficits”. In order to enforce and oversee the systemization of national deficits and policies developed by governments, the treaty arranged the procedure to be fulfilled through the Stability and Growth Pact of 1997. The SDP defines an “excessive deficit” as being above 3 percent of GDP and above 60 percent of the public debt. In addition, a preventive action is constructed to encourage member states to avoid excessive deficits. For instance, various governments face deficit bias due to domestic pressure and political agendas. Through a summit of finance ministers to discuss fiscal policy, the SGP attempts to help with budgetary discipline. In case of a breach of the deficit limit, a corrective action is designed to guide member states through actions established to fix a country’s budget process through EU groundwork designed to override the situation. With this said, if a country cannot achieve to stay below 3 percent of GDP or below 60 percent of public debt then a decision is made through QMV, qualified majority voting, by recommendation from the Commission. Finally, if a member state undermines the pact, sanctions serve as a precautionary threat to avoid defiance.
However, while the pact seems like a solid plan, fiscal policy sovereignty is not removed. Governments and their parliaments/policy makers/fiscal policies are in full control as they only agree to face the consequences of breaching the pact. With this said, the SGP revolves around recommendations and not strict demands from the Council. This ultimately can causes issues as some governments are more concerned with voters and their own political agenda rather than the union as a whole. Additionally, preventive action is designed to avoid reaching corrective action. With this said, the first action is the most important as it is the moment when a Member State isn’t in an excessive deficit. For corrective action to work, it takes time to process and evaluate the situation for any recommendation for reducing deficits to be made. For recommendations to actually work depends on the level of compliance of the Member States. In the same manner, it takes just as long time for sanctions to be imposed as well; if ever necessary. Also, all decisions are made by the Commission; which can be labeled or considered a highly political institution, which can exploit many assumptions within the pact
Anyhow, because fiscal policy is a national concern, it is not hard for the Member States to find themselves with large deficits. In 2003, France and Germany found themselves with an excessive deficit, however, the Eurogroup (Council of Finance Ministers of the Eurozone) placed the SGP in ‘abeyance’; temporary suspension. The Eurogroup is supposed to act on the Commission’s proposals but recanted because they typically hate being aggressive with strong Member States. Hence, preventing France and Germany from being sanctioned and exposing the failure of the SGP. With this said, the pact needed to be reformed so it was decided to expand and through the “Six Pack-Two Pack” and Treaty on Stability: Coordination and Governance (TSCG) or Fiscal Compact. In 2011, the Six Pack allows surveillance to be reinforced for the Member States who have excessive deficits and debts to reducing macroeconomic imbalances and ensure the growth of national finances through either preventive or corrective actions. In 2013, Two-Pack was established to improve budgetary coordination through a common budgetary timeline and rules for the Member States by supervising the Member States experiencing difficulties with financial stability, receiving financial assistance, or emerging from adjustment programmes. In 2012, the Treaty of Stability Coordination and Growth requires the Member States to establish a budget rule preserved through in legislation to make fiscal discipline a priority and obligation. However, TSCG is not accurate as it encourages to be in each country’s constitution; but many have it at a lower level or not at all. Additionally, along with SGP reform, a European semester was introduced; which requires a publication of forecasts of the year to the Commissioner to harmonize expectations and eliminate unrealistic previsions.
In conclusion, at the end of the day, the deficit is a nation’s responsibility and the SGP serves an overseer and fixer; yet the pact has proven itself to be a failure. For example, in 2011, the multiple Member States, 24 out of 28, had an excessive deficit. Additionally, in 2014, 17 had an excessive deficit. Yet, member states validating the SGP received no sanctions. In truth, the pact focuses too much on keeping deficits below 3 percent and debt below 60 percent. The idea that budgets should be even or in surplus so that automatic stabilizers can work in recessions is ideal and logical. But this would only work if all countries met the requirements before implementation. Additionally, because the Member States must achieve targets each year, the new regulations do not take into consideration the flexibility that the Member States need to balance budgets across the economic cycle. In other words, regulations allow for a deficit as long as the Member States have balanced accounts.