Reform of the Stability and Growth Pact

Abstract

The objective of the Stability and Growth Pact is to secure sound fiscal policies, which have remained a national responsibility in Economic and Monetary Union. Ever since it first took effect, the Stability and Growth Pact had been subject to a reform debate, ultimately leading to its redesign in 2005. The debate intensified in 2002, when several European countries suffered from growing budgetary problems, and culminated in November 2003, when the Ecofin Council decided not to act upon European Commission recommendations to move to the next steps of the excessive deficit procedure for France and Germany and instead adopted conclusions putting the procedures in abeyance subject to certain undertakings by the countries concerned. Consequently, the Commission brought an action before the European Court of Justice. The conflict surrounding the correct procedure in line with the provisions of the Treaty establishing the European Community (the Treaty) and the Stability and Growth Pact, i.e. the correct interpretation and implementation of the procedural and factual steps laid down therein, brought to light differences of opinion between the EU Member States and the European Commission as well as among the Member States themselves. Against this background, the European Commission presented concrete proposals to reform the Stability and Growth Pact in the fall of 2004. At an extraordinary Ecofin meeting on March 20, 2005, the EU finance ministers reached a compromise on the reform of the Stability and Growth Pact. The reform includes measures applicable to both the preventive and the corrective arms of the Stability and Growth Pact. The top priority of the reform was to enhance Member States' national ownership of the fiscal framework and hence to safeguard the sustainability of public finances in the Economic and Monetary Union in the long run. Experience to date does not allow for a final assessment, but from the vantage point of monetary policy, certain weaknesses remain that had already been pointed out during the reform debate.

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