The Stability and Growth Pact Frederick University 2013
The Stability and Growth Pact n n n Adopted in 1997 to facilitate and maintain the stability of the EMU to avoid damages caused by debt politics followed by EMU Member State which would impact the whole Eurozone
The SGP n n Enables the continuity of budgetary discipline efforts after the introduction of the Euro Sets medium term objective of budgetary positions close to balance or in surplus
The Six Pack Rules “Six Pack” of five regulations and one directive for economic and fiscal surveillance - institutionalize the austerity policies as a “new model of economic governance. ” - Entered into force in December 2011
Budget deficits. Member countries in excessive deficit procedure that are not taking adequate actions to bring their budget deficits below 3% of GDP should comply with specific recommendations within a period of three years and can be subjected to financial sanctions. •
Public debt n If the 60% reference for the debt-to-GDP ratio is not respected, the Member State concerned will be placed in excessive deficit procedure (even if its deficit is below 3%!), after taking into account all relevant factors and the impact of the economic cycle, if the gap between its debt level and the 60% reference is not reduced by 1/20 th annually (on average over 3 years).
Public debt n A negative assessment of the progress made towards compliance with the debt benchmark during the transition period could lead to the opening of an excessive deficit procedure.
New expenditure benchmark n A country specific medium-term budgetary objective provide guidance for budgetary planning and execution and places a cap on the annual growth of public expenditures in accordance with equivalent permanent revenues growth. Deviations from this benchmark can lead to a financial sanction.
Reducing macroeconomic imbalances An Excessive Imbalances Procedure is set up to identify and correct macroeconomic imbalances and serious gaps in competitiveness. It relies on the following main elements: n Preventive and corrective action n Rigorous enforcement
Preventive and corrective action n The Commission and the Council are allowed to adopt preventive recommendations at an early stage before the imbalances become large. In more serious cases, there is also a corrective arm where an excessive imbalance procedure can be opened for a Member State. In this case, the Member State concerned will have to submit a corrective action plan with a clear roadmap and deadlines for implementing corrective action. Surveillance will be stepped up on the basis of regular progress reports submitted by the Member States concerned.
Rigorous enforcement n A new enforcement regime is established for euro area countries. It consists of a two-step approach whereby an interest-bearing deposit can be imposed after one failure to comply with the recommended corrective action. After a second compliance failure, this interest-bearing deposit can be converted into a fine. Sanctions can also be imposed for failing twice to submit a sufficient corrective action plan.
An early warning system An alert system is established based on an economic reading of a scoreboard consisting of a set of ten indicators covering the major sources of macro-economic imbalances
An early warning system n n 3 year backward moving average of the current account balance as a percent of GDP, with the a threshold of +6% of GDP and - 4% of GDP; net international investment position as a percent of GDP, with a threshold of 35% of GDP;
An early warning system n n 5 years percentage change of export market shares measured in values, with a threshold of -6%; 3 years percentage change in nominal unit labor cost, with thresholds of +9% for euro-area countries and +12% for non-euro-area countries.
An early warning system n n 3 years percentage change of the real effective exchange rates based on HICP/CPI deflators, relative to 35 other industrial countries, with thresholds of /+5% for euro-area countries and /+11% for non-euro-area countries; private sector debt in % of GDP with a threshold of 160%;
An early warning system private sector credit flow in % of GDP with a threshold of 15%; n year-on-year changes in house prices relative to a Eurostat consumption deflator, with a threshold of 6%; n
An early warning system n n general government sector debt in % of GDP with a threshold of 60%; 3 -year backward moving average of unemployment rate, with the threshold of 10%
Treaty on Stability, Coordination and Governance n n n Intergovernmental agreement “Fiscal Compact” Ensure convergence towards the country specific medium term objective, with a lower limit of structural deficit of 0. 5% of GDP Budget rules to be implemented in national law Independent institutions
The European Semester n n yearly cycle of EU economic policy guidance and country-specific surveillance each year the European Commission undertakes a detailed analysis of EU Member States' programs of economic and structural reforms and provides them with recommendations for the next 12 -18 months
The two pack n n the latest piece of the EU's economic governance revamp joins other instruments such as the European Semester, the "six pack" and the Fiscal Compact in ensuring that the EU's economic and monetary union is less fragmented and that its component countries run fiscally sound policies.
The “Two Pack” regulations n Countries will need to present their draft budgets to the European Commission by October 15 for assessment n Setting of specific rules and procedures for enhanced surveillance of any Eurozone country in distress
Fiscal compliance 2013
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