What Is the Stability And Growth Pact?

The Stability and Growth Pact (SGP) is a binding diplomatic agreement between European Union (EU) member states to coordinate their economic policies and activities cohesively, with the primary purpose of ensuring stability of the Economic and Monetary Union. Its legislative foundation is the language of Articles 121 and 126 of the Treaty on the Functioning of the European Union, which came into effect on January 1, 1958; however, the Pact itself was only formalized via council resolution in July 1997, and fully came into effect on January 1, 1999. Its primary effect is the limiting of budget deficits and debt relative to gross domestic product (GDP). The European Commission and the Council of Ministers surveils member states and issues an annual recommendation on policy measures to keep each member state compliant with budget regulations.

Understanding the Stability And Growth Pact (SGP)

The Stability and Growth Pact (SGP) sets two hard limits on European Union member states. The first is that a state’s budget deficit cannot exceed three percent of its GDP and its national debt cannot exceed 60% of its GDP. In cases where a national debt exceeds 60% of the member state’s GDP, it must be declining at an acceptable pace to within acceptable limits to avoid incurring penalties.

All European Union member states are required to submit an SGP compliance report to the European Commission and Council of Ministers in order to be evaluated and scrutinized for compliance, as well as to inform the aforementioned entities of the expected economic development of the member state for the current and subsequent three years. These are called “stability programmes” for Eurozone member states and “convergence programs” for non-Eurozone member states. This reflects one important aim of the SGP, which is to regulate the stability of the Euro. Nevertheless, the content for the different types of reports are identical. In 2005, the SGP was reformed, requiring these economic reports to come include a “Medium-Term Budget Objective,” or MTO, which is a way by which the member state shows the European Commission and Council of Ministers how it intends to bring its balance sheet within acceptable regulatory standards. If a member state is outside of acceptable limits and is not declining back to acceptable limits, the EU initiates a so-called “Excessive Deficit Procedure,” whereby the member state is issued a deadline to comply and a detailed economic blueprint for recovery and to bring the nation back under acceptable limits.

Criticisms of the Stability and Growth Pact

The Stability and Growth Pact is routinely criticized because it is nearly impossible to bring charges against the larger member states such as France and Germany. Indeed, the Council of Ministers has never levied penalties against either nation, despite having dealt heavy penalties on Portugal in 2002 and Greece in 2005, though fines were never assessed. This is largely as a result of the two nations’ hefty and disproportionate representation on the Council of Ministers. The SGP was a major talking point during the political campaigning leading up to the British referendum on Brexit in 2016.