Stability and Growth Pact [print sheet]
Last updated: 24/09/07

The thirteen EU members that use the Euro as their currency agreed in 1997 to keep the amount they spent and borrowed under control in order to help create stable conditions for the new currency. This agreement was called the Stability and Growth Pact (SGP). However, several eurozone members have not kept to the rules, so the SGP was reformed in 2005 to allow countries more flexibility. Given the uneven performance of the new currency, the failure of the original SGP has been widely criticised.

The Maastricht Treaty (1992) set rules for all countries to reach in order to achieve Economic and Monetary Union (EMU): low inflation, low interest rates and controlled public debt and spending. The SGP, agreed in 1997, said that the same rules should apply once the Euro was launched. All EU members had to take part, but some like Britain who had decided not to use the Euro, were not bound by the penalties. Once the Euro was launched, many countries had difficulty meeting the SGP rules. In 2003 the largest economies in the eurozone, France and Germany, broke the rules. However, because these countries promised to reach the SGP targets as soon as possible, the Commission did not take strong action against them. This made the SGP look weak and the Council of the European Union decided to suspend it. In March 2005, the Council agreed a reformed SGP with much more flexible rules. Even these were challenged in August 2007, as the French President Sarkozy has looked to revitalise the French economy outside the framework of the SGP.

The original Pact said that all countries in the Eurozone should aim to keep their annual budget deficits below three percent of GDP, and keep total public debt below sixty percent of GDP. If a country broke the rules, it had to take measures to reduce its deficit. If it broke the rules in three consecutive years, the Commission could impose a fine of up to 0.5 percent of GDP. The Commission never used these powers, preferring to informally rebuke countries when they broke the rules. In March 2005, the European Council agreed a reform to the SGP. On the surface this maintained the key rules on deficits and debt, but the small print contained a long list of exceptions for types of spending that would not be counted as part of the debt. This included spending on education, research, defence, aid and what they called 'the unification of Europe.'

• In 2006, Germany had a budget deficit of 1.9 percent of GDP. France's deficit was 2.7 percent.
• In 2006, France's public debt was 64.7 percent of GDP; Germany's was 66.8 percent; and both Greece and Italy's were over 100 percent of GDP.

For

• The SGP shows that the eurozone countries are committed to the Euro.
• Many economists argue that the old strict rules on debt and borrowing were not necessary as long as there is reasonable economic growth.
• The SGP discourages governments from destabilising the eurozone by borrowing money to win elections and instead encourage them to think about long-term stability.

Against

• Even if the old SGP was too rigid, the new version has so many exemptions that it is in fact difficult to breach it.
• By failing to impose penalties on Germany and France, the Commission has shown that there are no effective rules on budget deficits or public debt in the eurozone.
• Because countries have to meet the targets every year, the new rules do not take account of the flexibility governments sometimes need to balance their budgets across the economic cycle.
• The rules should allow for a deficit of capital spending as long as a country's current account is balanced.

‘'I know very well that the stability and growth pact is stupid…. The pact is imperfect. We need a more intelligent tool and more flexibility.' - Romano Prodi, EU Commission President, 1999-2004

'[The SGP] is a political totem, a symbol that euro-using countries will not cheat each other.' - The Economist, 24 October 2002