Abstract
In this paper, we review why and how the Stability and Growth Pact (SGP) was introduced, then discuss the problems and prospects. We conclude by pointing out some lessons and some topics for future research.
The SGP was the EU's answer to the question of whether Member States could maintain budgetary discipline once they were allowed to join Stage III of EMU (Economic and Monetary Union). Without such a pact, it was feared that Member States would be tempted to expand fiscal deficits, inviting inflation and euro depreciation. For this reason the Pact was considered indispensable for a successful EMU, and Germany was the principal motor in its introduction.
As it turned out, Germany became one of the twelve countries that, as of November 2004, were judged to have an “excessive deficit”. More problematic was the decision by the Ecofin, in November 2003, not to impose sanctions on Germany and France. Then in September 2004, it was revealed that Greece had never actually satisfied the 3% criteria.
The SGP is currently under review and the outcome will be known in March 2005. In the meantime, there are three lessons; (1) German fears for loss of budgetary discipline after Stage III were justified, (2) the problem of regional differences in budgetary balances will not go away by merely establishing a unified EU fiscal authority, (3) signing a pact is not sufficient when its workability depends critically on credibility of data. Topics for future research would include, aside from where the SGP is going, why smaller countries tend to be more successful in achieving fiscal balance, and why even among smaller countries some successes turn sour with time.
