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The Stability and Growth Pact (SGP) is an agreement, among the 27 Member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU). Based primarily on Articles 121 and 126 of the Treaty on the Functioning of the European Union, it consists of fiscal monitoring of members by the European Commission and the Council of Ministers, and the issuing of a yearly recommendation for policy actions to ensure a full compliance with the SGP also in the medium-term. If a Member State breaches the SGP's outlined maximum limit for government deficit and debt, the surveillance and request for corrective action will intensify through the declaration of an Excessive Deficit Procedure (EDP); and if these corrective actions continue to remain absent after multiple warnings, the Member State can ultimately be issued economic sanctions. The pact was outlined by a resolution and two council regulations in July 1997. The first regulation "on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies", known as the "preventive arm", entered into force 1 July 1998. The second regulation "on speeding up and clarifying the implementation of the excessive deficit procedure", known as the "dissuasive arm", entered into force 1 January 1999.

The purpose of the pact was to ensure that fiscal discipline would be maintained and enforced in the EMU. All 27 EU member states are automatically members of both the EMU and the SGP, as this is defined by paragraphs in the EU Treaty itself. The fiscal discipline is ensured by the SGP by requiring each Member State, to implement a fiscal policy aiming for the country to stay within the limits on government deficit (3% of GDP) and debt (60% of GDP); and in case of having a debt level above 60% it should each year decline with a satisfactory pace towards a level below. As outlined by the "preventive arm" regulation, all EU member states are each year obliged to submit a SGP compliance report for the scrutiny and evaluation of the European Commission and the Council of Ministers, that will present the country's expected fiscal development for the current and subsequent three years. These reports are called "stability programmes" for eurozone Member States and "convergence programmes" for non-eurozone Member States, but despite having different titles they are identical in regards of the content. After the reform of the SGP in 2005, these programmes have also included the Medium-Term budgetary Objectives (MTO's), being individually calculated for each Member State as the medium-term sustainable average-limit for the country's structural deficit, and the Member State is also obliged to outline the measures it intends to implement to attain its MTO. If the EU Member State do not comply with both the deficit limit and the debt limit, a so-called "Excessive Deficit Procedure" (EDP) is initiated along with a deadline to comply, which basically includes and outlines an "adjustment path towards reaching the MTO". This procedure is outlined by the "dissuasive arm" regulation.

The SGP was initially proposed by German finance minister Theo Waigel in the mid 1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German economy's strong performance since the 1950s. The German government hoped to ensure the continuation of that policy through the SGP, which would ensure the prevailance of fiscal responsibility, and limit the ability of governments to exert inflationary pressures on the European economy. As such, it was also described to be a key tool for the Member States adopting the euro, to ensure that they did not only met the Maastricht convergence criteria at the time of adopting the euro, but kept on to comply with the fiscal criteria for the following years.

Criticism

The Pact has been criticised by some as being insufficiently flexible and needing to be applied over the economic cycle rather than in any one year. They fear that by limiting governments' abilities to spend during economic slumps it may hamper growth. In contrast, other critics think that the Pact is too flexible; economist Antonio Martino writes: "The fiscal constraints introduced with the new currency must be criticized not because they are undesirable—in my view they are a necessary component of a liberal order—but because they are ineffective. This is amply evidenced by the “creative accounting” gimmickry used by many countries to achieve the required deficit to GDP ratio of 3 percent, and by the immediate abandonment of fiscal prudence by some countries as soon as they were included in the euro club. Also, the Stability Pact has been watered down at the request of Germany and France."

Some remark that it has been applied inconsistently: the Council of Ministers failed to apply sanctions against France and Germany, while punitive proceedings were started (but fines never applied) when dealing with Portugal (2002) and Greece (2005). In 2002 the European Commission President (1999–2004) Romano Prodi described it as "stupid", but was still required by the Treaty to seek to apply its provisions.

The Pact has proved to be unenforceable against big countries such as France and Germany, which were its strongest promoters when it was created. These countries have run "excessive" deficits under the Pact definition for some years. The reasons that larger countries have not been punished include their influence and large number of votes on the Council of Ministers, which must approve sanctions; their greater resistance to "naming and shaming" tactics, since their electorates tend to be less concerned by their perceptions in the European Union; their weaker commitment to the euro compared to smaller states; and the greater role of government spending in their larger and more enclosed economies. The Pact was further weakened in 2005 to waive France's and Germany's violations.

Reform 2005

In March 2005, the EU Council, under the pressure of France and Germany, relaxed the rules; the EC said it was to respond to criticisms of insufficient flexibility and to make the pact more enforceable.

The Ecofin agreed on a reform of the SGP. The ceilings of 3% for budget deficit and 60% for public debt were maintained, but the decision to declare a country in excessive deficit can now rely on certain parameters: the behaviour of the cyclically adjusted budget, the level of debt, the duration of the slow growth period and the possibility that the deficit is related to productivity-enhancing procedures.

The pact is part of a set of Council Regulations, decided upon the European Council Summit 22–23 March 2005.

Reform changes of the preventive arm

• Country-specific Medium-Term budgetary Objectives (MTO)'s: Previously throughout 1999-2004 the SGP had outlined a common MTO for all Member States, which was "to achieve a budgetary position of close to balance or in surplus over a complete business cycle". After the reform, MTOs will now be calculated to country-specific values according to "the economic and budgetary position and sustainability risks of the Member State", based upon the state's current debt-to-GDP ratio and long-term potential GDP growth, while the overall objective over the medium term is still "to achieve a budgetary position of close to balance or in surplus over a complete business cycle". No exact formula for the calculation of the country specific MTO was presented in 2005, but it was emphasized the upper limit for the MTO should be at a level "providing a safety margin towards continuously respecting the government's 3% deficit limit, while ensuring fiscal sustainability in the long run". In addition it was enforced by the EU regulation, that the upper MTO limit for eurozone states or ERM II Member States should be: Max. 1.0% of GDP in structural deficit if the state had a combination of low debt and high potential growth, and if the opposite was the case - or if the state suffered from increased age-related sustainability risks in the long term, then the upper MTO limit should move up to be in "balance or in surplus". Finally it was emphasized, that each Member State has the task to select its MTO when submitting its yearly convergence/stability programme report, and always allowed to select its MTO at a more ambitious level compared to the upper MTO limit, if this better suited its medium-term fiscal policy.
• Minimum annual budgetary effort - for states on the adjustment path to reach its MTO: All Member States agreed, that fiscal consolidation of the budget should be pursued "when the economic conditions are favourable", which was defined as being periods where the actual GDP growth exceeded the average for long-term potential growth. In regards of windfall revenues, a rule was also agreed, that such funds should be spend directly on reduction of government deficit and debt. In addition a special adjustment rule was agreed for all Eurozone states and ERM-II member states being found not yet to have reached their MTO, outlining that they commit to implement yearly improvements for its structural deficit equal to minimum 0.5% of GDP.
• Early-warning system: The existing early-warning mechanism is expanded. The European Commission can now also issue an "opinion" direct to member states, without a prior Council involvement, in situations where the opinion function as a formal advice and encouragement to a Member State for realising the agreed adjustment path towards reaching its declared MTO. This mean that the Commission will not limit its opinon/recommendations only to situations with an acute risk of breaching the 3% of GDP reference value, but also contact Member States with a notification letter in cases where it find unjustified deviations from the adjustment path towards the declared MTO or an unexpected breach of the MTO itself (even if the 3% deficit is fully respected).
• Structural reforms: To ensure that implementation of needed structural reforms will not be slowed down due to the regime of complying with the adjustment path towards reaching a declared MTO, it was agreed that implementation of major structural reforms (if they have direct long-term cost-saving effects - and can be verified to improve fiscal sustainability over the long term - i.e. pension scheme reforms), should automatically allow for a temporary deviation from the MTO or its adjustment path, equal to the costs of implementing the structural reform, conditional that the 3% deficit limit would be respected and the MTO or MTO-adjustment path would be reached again within the four-year programme period.

Reform changes of the correcting arm

• Definition of excessive deficits:
• Deadlines and repetition of steps in the excessive deficit procedure:
• Taking into account systemic pension reforms:
• Focus on debt and fiscal sustainability:

Reform changes of the economic governance

• Fiscal governance:
• Statistical governance:

Reform 2011

This section needs to be updated. Please help update this article to reflect recent events or newly available information. (September 2011)

In March 2011, following the 2010 European sovereign debt crisis, the EU member states adopted a new reform under the Open Method of Coordination, aiming at straightening the rules e.g. by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. The new "Euro Plus Pact" is designed as a more stringent successor to the Stability and Growth Pact, which has not been implemented consistently. The measures are controversial not only because of the closed way in which it was developed but also for the goals that it postulates.

The four broad strategic goals are:

• fostering competitiveness
• fostering employment
• contributing to the sustainability of public finances
• reinforcing financial stability.

An additional fifth issue is:

• tax policy coordination

The European Fiscal Compact is a proposal for a treaty about fiscal integration described in a decision adopted on 9 December 2011 by the European Council. The participants are the Eurozone member states and all other EU members without the United Kingdom and Czech Republic. Treaty text is still to be drafted and participation approvals from national parliaments are still to be granted.

Member states by SGP criteria

The deficit and debt criterion is applied to both Eurozone and non-Eurozone EU member states. Data in the table are for the fiscal year 2011, being published as part of the European Commission's economic forecast in May 2012. And the past years with SGP breaches, were identified by the annexed table 53B and 55B from the report.

Fiscal data for 2011	Budget deficit to GDP	Debt-to-GDP ratio	Breaches of the deficit/debt rule (since 1998)	Deadline for compliance with SGP
Reference value	max. 3.0%	max. 60.0% (or if above: declining towards 60%)
Austria	2.6%	072.2% (increasing)	1998–99, 2001, 2004, 2008–current	2013
Belgium	3.7%	098.0% (increasing)	2008–current	2012
Bulgaria	2.1%	016.3%	2009–10	Comply
Cyprus	6.3%	071.6% (increasing)	1998–99, 2001–04, 2009–current	2012
Czech Republic	3.1%	041.2%	1998–2003, 2005, 2009–current	2013
Denmark	1.8%	046.5%	No breaches	2013
Estonia	-1.0% (surplus)	006.0%	1999	Comply
Finland	0.5%	048.6%	No breaches	Comply
France	5.2%	085.8% (increasing)	2002–05, 2007–current	2013
Germany	1.0%	081.2% (declining)	1998–99, 2002–05, 2008–10	Comply
Greece	9.1%	165.3% (increasing)	1998–current	2014
Hungary	-4.3% (surplus)	080.6% (declining)	1998–99, 2001–10	2012
Ireland	13.1%	108.2% (increasing)	2008–current	2015
Italy	3.9%	120.1% (increasing)	2001–06, 2008–current	2012
Latvia	3.5%	042.6%	1999, 2008–current	2012
Lithuania	5.5%	038.5%	2000–01, 2008–current	2012
Luxembourg	0.6%	018.2%	No breaches	Comply
Malta	2.7%	072.0% (increasing)	1998–2004, 2008–current	2011
Netherlands	4.7%	065.2% (increasing)	2003, 2009–current	2013
Poland	5.1%	056.3%	1998, 2001–06, 2008–current	2012
Portugal	4.2%	107.8% (increasing)	1998–current	2014
Romania	5.2%	033.3%	1998–2001, 2008–current	2012
Slovakia	4.8%	043.3%	1998–2002, 2006, 2009–current	2013
Slovenia	6.4%	047.6%	2000–01, 2009–current	2013
Spain	8.5%	068.5% (increasing)	2008–current	2014
Sweden	-0.3% (surplus)	038.4%	No breaches	Comply
United Kingdom	8.3%	085.7% (increasing)	2003–05, 2008–current	2014 (FY)
Eurozone 17	4.1%	088.0% (increasing)	2003–05, 2008–current	—
EU27	4.5%	083.0% (increasing)	2003–05, 2008–current	—

For both Denmark and Finland an EDP was initiated on 13 July 2010, based upon that the forecasted 2010 figures were thought to breach the SGP. The forecasts however, was later proved to have been too negative, as the actual fiscal accounts for both 2010 and 2011 did not constitute any SGP breach.

Medium-Term budgetary Objective (MTO)

In order to ensure long-term compliance with the SGP deficit and debt criteria, the member states has since the SGP-reform in March 2005 strived towards reaching their country-specific Medium-Term budgetary Objective (MTO), which is the state's calculated upper target limit for its structural deficit relative to GDP, considered to ensure sustainability of the government accounts throughout the next roughly 20 years (considering both future potential GDP growth, future cost of government debt, and future increases in age-related costs). The structural deficit is calculated by the European Commission as the cyclical-adjusted deficit minus "one-off expenditures" (i.e. one-off payments due to reforming a pension scheme). The cyclical-adjusted deficit is calculated by adjusting the achieved general government deficit (in % of GDP) compared to each years relative economic growth position in the business cycle, which is found by comparing the achieved GDP growth with the potential GDP growth. So if a year is recorded with average GDP growth in the business cycle, then the "cyclical-adjusted deficit" will be equal to the "government budget deficit". In that way, due to being resistant to GDP growth changes, the structural deficit is considered to be neutral and comparable across an entire business cycle (incl. both recession years and "overheated years"), making it perfect to be used consistently as a medium-term budgetary objective.

Whenever a country does not reach its MTO, it is required to implement yearly improvements comparable to minimum 0.5% of GDP, although it should be noted that several sub-rules exist altering this requirement. At the moment it is the responsibility of each member state to define their current MTO, and inform the European Commission about it each year in the state's submitted Convergence/Stability report. The EU member states having ratified the Fiscal Compact and being bound by its fiscal provisions, are obliged to select a MTO which does not exceed a structural deficit at maximum 1.0% of GDP if they have a debt-to-GDP ratio significantly below 60%, and maximum 0.5% of GDP if they have a debt-to-GDP ratio above 60%. As of April 2013, the following states are not bound by the fiscal provisions of the Fiscal Compact (note that for non-Eurozone states to be bound by the fiscal provisions, it is not enough just to ratify the Fiscal Compact, they also need to attach a declaration of intend to be bound by the fiscal provisions, before this is the case): UK, Czech Republic, Croatia, Latvia, Lithuania, Bulgaria, Poland, Sweden, Hungary.

The table below has listed all country-specific MTOs throughout 2005-2013, and colored each year red/green according to whether or not the MTO was achieved, according to the latest published calculation of the structural deficits, which can be found listed in the European Commission's AMECO database or its latest Economic Forecast report.

See also

• Convergence criteria for joining the Eurozone
• Fiscal union
• Euro Plus Pact
• Sixpack (EU)
• European sovereign-debt crisis: List of acronyms

Bibliography

• Matthias Belafi und Roman Maruhn (2005): C·A·P-Position: Ein neuer Stabilitätspakt? Bilanz des Gipfelkompromisses, Centrum für angewandte Politikforschung Template:De icon
• Anne Brunila, Marco Buti & Daniele Franco,: The Stability and Growth Pact, Palgrave, 2001
• Peter Bofinger (2003): »The Stability and Growth Pact neglects the policy mix between fiscal and monetary policy«, in: Intereconomics, Review of European Economic Policy, 1, S. 4–7.
• Daniel Gros (2005): Reforming the Stability Pact, S. 14–17, in: Boonstra, Eijffinger, Gros, Hefeker (2005), Forum: The Stability and Growth Pact in Need of Reform, in: Intereconomics, 40. Jg., Nr. 1, S. 4–21.
• Friedrich Heinemann (2004): Die strategische Klugheit der Dummheit – keine Flexibilisierung des Stabilitätspaktes ohne Entpolitisierung, S. 62–71, in: Hefeker, Heinemann, Zimmermann (2004), Wirtschaftspolitisches Forum: Braucht die EU einen flexibleren Stabilitätspakt?, in: Zeitschrift für Wirtschaftspolitik, 53. Jahrgang, Heft 1, S. 53–80. Template:De icon
• Kai Hentschelmann (2010): Der Stabilitäts- und Wachstumspakt als Ordnungsrahmen in Krisenzeiten, Europa-Kolleg Hamburg, Institute for European Integration, Discussion Paper Nr. 1/10. Template:De icon

References

1. Consolidated EU treaties
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26. "AMECO database: Structural balance of general government - Adjustment based on potential GDP (Excessive deficit procedure)". European Commission. Automatic updated 3 times per year. Retrieved 3 May 2013. {{cite web}}: Check date values in: |date= (help)
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32. "Konvergens program - Danmark 2013" (PDF) (in Danish). Økonomi- og Indenrigsministeriet. 30 April 2013. Retrieved 3 May 2013.
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External links

• European Commission, Directorate General for Economic and Financial Affairs. Stability and Growth Pact
• Federal Statistical Office Germany page on General government consolidated gross debt as a percentage of GDP
• Federal Statistical Office Germany page on Share of net borrowing or net lending of general government in the gross domestic product
• Björn Hacker/Till van Treeck: What influence for European governance? The reformed stability and growth pact, the Europe 2020 strategy and the "European Semester", Friedrich-Ebert-Stiftung, December 2010 (PDF 115 KB)

• Use dmy dates from March 2013
• Eurozone fiscal matters
• Economy of the European Union
• Fiscal policy
• 1997 in economics
• 1997 in the European Union