Reforms to the Stability and Growth Pact, November 2002

On 27 November 2002 the European Commission adopted a Communication on strengthening the co-ordination of budgetary policies, which is intended to reform the Union's Stability and Growth Pact (SGP). The President of the European Commission, Romano Prodi, who only a few weeks earlier had been both praised and pilloried for describing the Pact as 'stupid', said the reforms would make it 'more intelligent and forward-looking'.

The SGP lies at the heart of the Union's Single Currency project, providing a framework for Member States' budgetary policies. There have, however, been concerns that the framework is too rigid. The Communication 'takes a hard critical look at the implementation of the SGP over the last four years, since the creation of the euro, and highlights shortcomings both in the interpretation, implementation and enforcement of the Pact.'

The Communication is part of a more general strategy to strengthen economic policy coordination. The European Commissioner responsible for economic and financial affairs, Pedro Solbes, said 'this Communication goes beyond the issues of fiscal consolidation. It addresses the need for Europe to raise its growth potential on a sustainable basis. It creates the room and the conditions under which sound budgetary policies will support and reinforce economic policies linked to the Lisbon strategy.'

It is expected that the proposals will now be approved by EU Finance Ministers and that Member States will then confirm their commitment to the SGP at the Spring 2003 European Council.

According to the Financial Times, the proposed reforms 'follow a twin-track approach, making life easier for countries with sound public finances, but cracking down harder on those with big deficits and national debts.'

There are five steps proposed in the Communication which are intended to improve the interpretation of the Stability and Growth Pact and to 'ensure a more rigorous adherence to the goal of sound and sustainable public finances'. Briefly, they are:

• Due account should be taken of the economic cycle when establishing budgetary objectives at EU level and when carrying out the surveillance of Member States budgetary positions.

• Clear transitional arrangements should be established for countries with underlying deficits exceeding the 'close to balance or in surplus' requirement. They would be required to achieve an annual improvement in the underlying budget position of 0.5% of GDP each year until the 'close-to-balance or surplus' requirement of the SGP has been reached.

• A pro-cyclical loosening of the budget in good times should be viewed as a violation of budgetary requirements at EU level, and should lead to an appropriate and timely response through the use of instruments provided in the Treaty.

• Budgetary policies should contribute to growth and employment. The 'close to balance or in surplus' requirement should be combined with the right incentives to help ensure the implementation of the Lisbon strategy.

• The sustainability of public finances should become a core policy objective at EU level with greater weight being attached to government debt ratios in the budgetary surveillance process.

In addition, there are a further four elements which the Commission believes are needed to help ensure effective implementation of the Pact:

• Member States should reaffirm their political commitment to the SGP in a 'Resolution to reinforce the coordination of budgetary policies'.

• The Commission intends to upgrade the analysis of economic and budgetary polices by embarking on a wide range of measures. In particular, the Commission intends to pay increasing attention to the quality of public finances when assessing stability and convergence programmes.

• Fiscal rules need to be backed up with effective and credible enforcement procedures.

• Greater external pressure on Member States to run sound public finances can be achieved through better communication.

Announcing the reforms, Commissioner Pedro Solbes said: 'With this Communication the Commission reaffirms its commitment to continue to play its role in ensuring that Member States comply with the Treaty requirements to avoid excessive deficit positions. We will continue to act in a decisive and robust manner if deficits breach the 3% of GDP reference value or if member states fail to achieve and sustain budget positions of 'close to balance or in surplus'. We will also ensure compliance with the debt criteria established in the Treaty.'

The Financial Times believes that the proposals will 'make the pact more flexible, by allowing countries with strong finances to run modest deficits to fund vital investment' and that the UK, Ireland and 'the Scandinavias' in particular will benefit.

Links:
European Commission:
	27.11.02:	Commission calls for stronger budgetary policy coordination [IP/02/1742]
	27.11.02:	Pedro Solbes: Communication on reinforcing the coordination of budgetary policies [SPEECH/02/592]
	21.11.02:	Communication from the Commission to the Council and the European Parliament: Strengthening the co-ordination of budgetary policies
	European Commission: DG Economic and Financial Affairs
BBC News Online:
	27.11.02:	EU set to reform budget rules
European Sources Online: Financial Times:
	27.11.02:	Prodi unveils EU stability pact reforms
European Sources Online: In Focus:
	European Commission looks set to ease the rules of the Stability and Growth Pact, July 2002
	Stability and Growth pact: European Commission suggests postponing the deadline date for balanced budgets until 2006, September 2002
	EU economic and employment policies to become 'more coherent and effective', September 2002
	Council adopts a formal Recommendation critical of aspects of Ireland's budgetary policy, 12 February 2001

Eric Davies
KnowEurope Researcher
Compiled: Thursday, 28 November 2002

On 27 November 2002 the European Commission adopted a Communication on strengthening the co-ordination of budgetary policies, which is intended to reform the Union's Stability and Growth Pact (SGP).