The Stability and Growth Pact : an Analysis of the Pros and Cons

Abstract

The Stability and Growth Pact (SGP) has attracted much attention since the idea was first suggested by German Finance Minister, Mr. Waigel, in late 1995. Naturally, there is not an unanimous view on the Pact: for some it is an unnecessary restriction; for others the Pact is necessary but requires further development and strengthening; finally there are those who consider that the SGP sets wrong objectives and, thus, while fiscal rules are necessary, must be replaced by some other arrangements. The discussion on the rationale of fiscal rules in a monetary union goes beyond this work. That is, the analysis in this work will be built upon the general consensus on the necessity of fiscal restrictions in the context of a multinational unification with the common currency. In the focus of the work stands the design of the Pact. Unanimously adopted in December 1996, the rules of the SGP caused substantial doubts already several years later. The first violations of the Pact took place already in the third year of its operation. The most astonishing is the fact that the country, which was the initiator of the Pact, has violated it among the first ones and called its credibility into question. This has led to intensive debates on the numeral rules of the Pact and its implementation which is said to be inadequate. Whence, the purpose of this work is to trace the operation of the SGP starting with its introduction and up to today, with the objective to find out what have caused the breach of the rules. The work attempts to answer the question, whether the SGP has properly fulfilled its role, that is, whether it proved to be an efficient mechanism for enforcing fiscal discipline.Aiming to provide a thorough and impartial answer to the posed question, the approach of detailed investigation of diverse studies and points of view is chosen in this work. When assessing the recent developments in the euro-area, the publications of the European Commission are chosen as probably most independent source of information. However, also the data stemming from the Commission is confronted with other views and studies. It is important to note that the results of the following investigation do not claim to give a precise answer to a question, but rather are a useful lead for further studies and debates.The work is organised as follows. In order to lay a good foundation for an assessment of the events around the SGP, the origin and the incentives to adopt the Pact are recalled in chapter 2. The description of the final version of the SGP in chapter 3 gives an insight into its structure, procedures and objectives. Having gained fundamental understanding on the backgrounds of the SGP, one can proceed to the assessment of the operation of the Pact. How have member states implemented the SGP and performed in its context? Had the new fiscal framework any influence on their budgetary choices? Have the enforcement mechanisms of the Pact properly functioned? Investigation of these questions, presented in chapter 4, reveals a number of shortcomings both in the rules of the Pact and in its implementation. However, the experience gained during the operation of the SGP has showed the possible directions for its further strengthening. The debate on the budgetary surveillance framework and its development are assessed in chapter 5. The issues concerning the conduct of fiscal policy in EMU are discussed in chapter 6. Chapter 7 introduces two courses of further possible development of the Pact: the first one, chosen by the EU institutions, and the other one, suggested by diverse academicians and policy-makers; with the objective to assess merits and disadvantages of both. Final considerations and conclusions are presented in chapter 8, supplemented by several recommendations on further treatment of the subject, which are based on the investigation carried out in the work.