The European Stability and Growth Pact in the International Crisis

Résumé du document

The European Council created the Stability and Growth Pact (SGP), an agreement among the 16 members of the European Union who take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union. The pact was adopted in its Amsterdam session on 17 June 1997 in order to guide the member states towards common policy goals. The pact binds all member states to engage in the prompt implementation of the excessive deficit procedure (EDP). The Council had clarified two important aspects that member states must follow. The first requirement states that the member states must have a budget deficit below three percent of the nation's gross domestic product (GDP); meanwhile, the second requirement targets debts, forcing member states to reduce their government debts below sixty percent of GDP.

The objective of the pact is to make the member states stay under the three percent budgetary deficit even in unfavorable periods unless "exceptional" circumstances emerge. Even if the circumstances are qualified as exceptional, the member states could only temporarily have a budget deficit in excess of the three per cent limit. For example, the member states would consider an economic downturn as an "exceptional event" only if "there is an annual fall in GDP of at least 2 percent." Furthermore, the SGP required countries to return below the three percent threshold within a year after the deficit rose above it, based on the SGP's definition of the word "temporarily." As constituted, this would have created difficulties during the international recession which started in December 2007, according to the United States National Bureau of Economic Research.

In 2005, however, the European Union (EU) heads of states met at a summit and revised the SGP. This leads to the question, Does the revised version of the Stability and Growth Pact better allow the member states to survive the international crisis economically? This analysis will try to answer this question in two different ways. After providing the necessary background to the SGP, it will explain if the original SGP could have successfully brought member states through the international crisis. Secondly, it will analyze if the changes to the SGP have better prepared the member states to react to the crisis.

Extraits

[...] This likely would have worsened the situation in these countries by reducing the spending capacity of much of the nations' citizens. The more flexible SGP, as currently constituted, allows the offending states to use counter-cyclical action if they choose to do so, since they have three or four years to attempt to rebuild the economy and reduce the deficit below three percent. The SGP, as currently constituted, provides a target for the member states but does not strongly force them to undesirable actions as the previous SGP would have in order for the member states to avoid sanctions. [...]

[...] This lack of freedom would have been an enormous problem in the current global down turn. Many member states now have budgetary deficits above three percent of GDP, so the SGP would have required them to decrease their budget deficit below three percent within one year to avoid sanctions. This, however, could require a pro-cyclical decrease in government spending, which would likely only feed the international economic crisis. Using pro- cyclical policies during recession, generally, only worsens the situation, and as formerly constituted, the SGP would have forced the offending member states to reduce their budget deficit in such a short period of time in order to meet pro-cyclical policies. [...]

[...] Secondly, the political nature of the SGP would have limited its potential to help member states in the current economic crisis. Often, sanctions in the SGP became a political struggle in which the smaller states tried to uphold the SGP and the larger states felt that they needed more flexibility, which led them to break the guidelines. Even though the larger countries repeatedly violated the act, the smaller countries did not have the freedom to do so, and also worry about alienating the larger nations. [...]

[...] The European Commission believes that the SGP does this by setting the target values. By setting an upper limit to the debt level at 60 percent of GDP and maintaining a deficit below three percent of GDP, the current SGP should help to protect countries in the current crisis by keeping them from accumulating debt as much as possible and consequently having to deal with a long term increase in interest rates. This keeps the debt burden lower, which in turn prevents the member states from worsening their economic situations as much as possible during the crisis, while maintaining some level of sovereignty for the member states to set their own fiscal and monetary policies. [...]

[...] This leads to the question, Does the revised version of the Stability and Growth Pact better allow the member states to survive the international crisis economically? This analysis will try to answer this question in two different ways. After providing the necessary background to the SGP, it will explain if the original SGP could have successfully brought member states through the international crisis. Secondly, it will analyze if the changes to the SGP have better prepared the member states to react to the crisis. [...]