EU Stability & Growth Pact

The Stability and Growth Pact

Relevant legal texts  -  Excessive Deficit and Early Warning Procedures

The Stability and Growth Pact (SGP) is the concrete EU answer to concerns on the continuation of budgetary discipline in; Economic and Monetary Union (EMU). Adopted in 1997, the SGP strengthened the Treaty provisions on fiscal discipline in EMU foreseen by articles 99 and 104, and the full provisions took effect when the euro was launched on 1 January 1999.

The principal concern of the SGP was enforcing fiscal discipline as a permanent feature of EMU. Safeguarding sound government finances as a means to strengthening the conditions for price stability and for strong and sustainable growth conducive to employment creation. However, it was also recognised that the loss of the exchange rate instrument in EMU would imply a greater role for automatic fiscal stabilisers at national level to help economies adjust to asymmetric shocks, and would make it "necessary to ensure that national budgetary policies support stability oriented monetary policies". This is the rationale behind the core commitment of the SGP, i.e. to set the "medium-term objective of budgetary positions close to balance or in surplus " which " will allow all Member States to deal with normal cyclical fluctuations while keeping the government deficit within the reference value of 3% of GDP".

Formally, the SGP consists of three elements as follows:

• a political commitment by all parties involved in the SGP (Commission, Member States, Council) to the full and timely implementation of the budget surveillance process. These are contained in a Resolution agreed by the Amsterdam European Council of 17 June 1997. This political commitment ensures that effective peer pressure is exerted on a Member State failing to live up to its commitments.

• preventive elements which through regular surveillance aim at preventing budget deficits going above the 3% reference value. To this end, Council Regulation 1466/97 reinforces the multilateral surveillance of budget positions and the co-ordination of economic policies. It foresees the submission by all Member States of stability and convergence programmes,  which are examined by the Council. The Regulation foresees also the possibility to trigger the early warning mechanism in the event a significance slippage in the budgetary position of  a Member State is identified.

• dissuasive elements which in the event of the 3% reference value being breached, require Member States to take immediate corrective action and, if necessary, allow for the imposition of sanctions. These elements are contained in Council Regulation 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure.

Besides these legal basis, the new Code of Conduct on the content and format of the stability and convergence programmes, endorsed by the ECOFIN Council on 11 October 2005, incorporates the essential elements of Council Regulation 1466/97 into guidelines to assist the Member States in drawing up their programmes. It also aims at facilitating the examination of the programmes by the Commission, the Economic and Financial Committee and the Council.

Relevant legal texts

Article 99 of the EC Treaty - the multilateral surveillance
Article 104 of the EC Treaty - the Excessive Deficit Procedure (EDP)
Protocol on the EDP annexed to the Treaty
Council Regulation 3605/93 on the application of the Protocol on the EDP
European Council Resolution on the Stability and Growth Pact
Council Regulation 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
Council Regulation 1055/2005 amending Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
Council Regulation 1467/97 on speeding up and clarifying the implementation of the EDP
Council Regulation 1056/2005 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure