The Stability and Growth Pact

von: Dr. Carsten Siegert

Table of contents 2

1 Introduction - European Monetary Union: from the Treaty of Maastricht to the Stability and Growth Pact 5

1.1 The Treaty of Maastricht 5
1.2 The Treaty of Amsterdam 5
1.3 Three Steps to the formation of an European Monetary Union 6
1.4 Criteria of Stability and Convergence - Selection of Member States for the Single Currency 6
1.5 From the criteria of stability and convergence to the Stability and Growth Pact 7
1.6 Legal framework of the Stability and Growth Pact 8

2 New monetarism - The Economic background of the Stability and Growth Pact 9

2.1 Essential features of new monetarism 9

2.1.1 Irrational decision making 10
2.1.2 Debts as an expression of mislead fiscal policy 10
2.1.3 Inflation 11
2.1.4 The future role of fiscal policy 11

3 Mechanics of the stability and growth pact 11

3.1 The budgetary rules of the Treaty of Amsterdam as basic principles for the SGP 11
3.2 The budgetary rules of the SGP,, 12

3.2.1 The government budget deficit rule 12
3.2.2 The medium-term balance rule 13
3.2.3 Why 60 % and 3 %?, 13

3.3 The implementation of the Stability and Growth Pact 14

3.3.1 “Stability”Committee 14
3.3.2 Formulation of national stability and convergence programs,, 14

3.4 Enforcing the SPG - The excessive deficit procedure 15

3.4.1 Early warning system to avoid excessive deficits 15
3.4.2 Penalties for Breach of Stability Pact Criteria 16

4 Assessment of the SGP – a look on the relevant indicators of the membership states of EU, Germany and of those countries joining the EU on May, 1st 2004 18

4.1 Development within the EU 18
4.2 Development in Germany 18
4.3 Development in the “acceding countries” 19

5 Conclusion 20

6 Appendix 22

6.1 References 22
6.2 Figures 27
6.3 Tables 29
 

1 Introduction - European Monetary Union: from the Treaty of Maastricht to the Stability and Growth Pact1

1.1 The Treaty of Maastricht

In December 1991 at a summit in Maastricht the twelve nations, which constituted the European Community at that time, agreed on a treaty to transform the European Community into an European Union (EU). This Treaty was signed 1992 and came effective on November 1st of 1993 as an amendment to the treaty of Rome, the treaty the European Community was build on.

1.2 The Treaty of Amsterdam2

Four years later the treaty of Amsterdam put the treaty of Maastricht into more concrete terms. The contracting parties agreed in Article B of this treaty that the Union will set itself (among others) the objective to promote economic and social progress through the establishment of an economic- and monetary union (EMU), ultimately including a single currency. Under title V and VI of this treaty the countries also agreed to build up common, foreign- and security policies as well as to intensify their cooperation in fields of justice und home affairs. Title VII defines the ideas of a common economic and monetary policy. The treaty of Amsterdam was signed on October, 2nd 1997. Since all the Member States had to ratify the treaty by their respective legislative procedures, it did not come into effect until the end of May 1999.

The European treaties, taken together, form the primary legislation and have characteristics of a constitution of the Community. The treaties provide the legal basis for all secondary legislation, i.e. regulations, directives and decisions of the institutions of the Community.

1.3 Three Steps to the formation of an European Monetary Union3

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1 Peichl, Andreas (2003), p. 1-3.

2 Cowgill, Anthony and Andrew (2003b), p. 2.

3 Bundesministerium für Finanzen (2003), p. 2.