2.
A Further Inquire about the Sustainability of Fiscal Policy in the EU
Fernando Ballabriga and Carlos Martinez-Mongay*
2.1 Introduction
The Stability and Growth Pact (SGP) is one of the main pillars of the Economic and
Monetary Union (EMU). It was agreed with the aim of setting a proper balance between
fiscal discipline and the macroeconomic stabilization role of fiscal policy. It was
conceived as a discipline device which should ensure budgetary balances close to balance
or in surplus, while keeping gross debt at low levels in terms of GDP.
Since the very moment of its conception the Pact has been the subject of numerous
criticisms, which would suggest more or less drastic reforms of the institutional
framework of the EU Member States (see, among many others, Brunila and Martinez-
Mongay, 2002; Buti et al., 2003, 2005). The debate on the drawbacks, challenges and
possible reforms of the Pact significantly gathered momentum in 2002, when budgetary
developments in some Member States, especially in Germany and France, put the Pact
under serious stress. The final trigger for reform took place in November 2003 when the
ECOFIN Council refused to adopt the recommendations by the European Commission to
step up the excessive deficit procedure for France and Germany (see, for instance, Buti,
2007).
In a communication adopted in September 2004 the European Commission put forward a
series of proposals to introduce changes in the Pact (European Commission, 2004). These
mainly aimed at avoiding pro-cyclical policies, better defining the medium-term
objective (MTO) of fiscal policy, giving greater prominence to the debt criterion,
considering economic circumstances in the implementation of the excessive deficit
procedure (EDP) and improving governance and enforcement. Taking the Commission
communication as a starting point, the ECOFIN Council of March 2005 reached an
agreement to introduce changes in the Pact. Where necessary, legislative changes were
proposed in both its preventive (surveillance and coordination of economic policies
basically through the assessment of convergence and stability programs) and corrective
(excessive deficit procedure) arms (Council, 2005). The legislative process ended in July
2005.
One of the most recurrent critical issues on the Pact was based on an apparently excessive
focus on short-term objectives for the budget deficit, which might not only create
incentives for creative accounting and the recourse to one-off deficit-reducing measures,
The views expressed in this paper are those of the authors and are not attributable to the European
Commission.