Class 6: Fiscal Policy and Stability and Growth Pact

1997: Main principles of the Resolution of the European Council on the Stability and Growth Pact

• treaty not a set of rules

• countries have to achieve balanced budgets over the business cycle

• budget deficit > 3% of GDP will be subject to fines

• circumstances, natural disaster or a decline of their GDP of more than 2% during one year

The New SGP

Help member states pursue a sustainable and inclusive growth through reforms and investments

Key aspect of the new SGP

• intro of medium term fiscal structural plans

• expenditure and reforms deliverables

• provisions for addressing macroeconomic imbalances to bring debt level on a sustainable downward path ina. 4 year fiscal adj period

Criticisms of the SGP

• too strict/lacks flexibility

• favoritism towards certain nations

• procyclical nature

1) Too Strict / Lacks Flexbility

• rules are very rigid (budget deficit cant exceed 3%, national debt cant exceed 60% of GDP)

• no flexbility regardless of econ circumstances

• many member states cant achieve the requirements

2) Perceived Favoritism toward certain members

• inequality of SGP rules, some countries treated differently (when germany and france broke rules council gave them time to make things right w/out punishment and vice versa for Portugal and Greece)

• disproportionate representation on the Council of Ministers

3) Procyclical Nature

SGP can exacerbate economic downturns for some member states

• reduce deficits during tough econ times

• gov have to cut spending and raise taxed during tough times

• weaken econ activ and increase unemployment

(Greece ex of this)

Strengths / Advantages of SGP

• accountability: promotes fiscal discipline

• standardization: member state coordination

promotes fiscal discipline

• clear and concreate requirements (punishment and reward system)

• focused on fiscal responsibility/accountability

• prevents excessive deficits and debt accumulation

member state coordination

• SGP keep member nations on same page and same standardized goals

• deeper economic integration and cohesion within EU

• fiscal unions/checks w/ monetary union in EU

European Fiscal Board (EFB)

independent body, overall direction of fiscal policy of the euro area

Main responsibilities of EFB

1) implementation of the Union fiscal framework

2) future evolution of the Union fiscal framework

3) prospective fiscal stance appropriate for the euro area

4) cooperate with the National Independent Fiscal Councisl

5) ad-hoc advice to the Commission President