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.
[...] Either the SGP would have led to a political disaster between large and small countries due to the crisis, or they would have had to break from the SGP altogether. Thus, while the restrictive nature of the original SGP would have worsened the economic conditions during the international crisis, the political processes surrounding it could have threatened the existence of the SGP. The Stability and Growth Pact: Successes Post-2005 Even though larger countries repeatedly violated the SGP, the smaller countries did not prefer to do that as they feared such actions would result in losing credibility. The larger states, however, needed the additional flexibility . [...]
[...] The flexibility afforded in both time and accounting standards gives the countries more freedom to use the SGP as a guideline during the current economic crisis while not giving unnecessary additional stress on the member states to conform to strict standards. Conclusion The European Commission has in fact gone so far as to claim that the SGP “provides the anchor for such [exit] strategies.” This is a bold statement that implies the member states need the SGP to stabilize the economies in the time of crisis. [...]
[...] In September 2004, current French President but then French Finance Minister Nicolas Sarkozy stated, the return under 3 percent is too brutal, there is a risk of dying from the cure.” Sarkozy clearly believed that the SGP restricted the flexibility for a nation such as France to decide its own fiscal and monetary policies, instead forcing it to return the deficit under three percent. In the current international economic crisis, this return would have certainly been a brutal one, and the countries would have met the “risk of dying from the ‘cure'” by trying to maintain SGP standards. Secondly, the political nature of the SGP would have limited its potential to help member states in the current economic crisis. [...]
[...] 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. [...]
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