101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey

As regards the preventive arm, the medium-term budgetary objective of Member States
should not necessarily be to achieve a balanced budget or surplus for all countries. Rather, the
economic and fiscal situation of each Member State, notably the current debt to GDP ratio,
potential GDP growth and sustainability of public finances, will be judged on a country-by-
country basis. Thus, countries with a combination of low debt and high potential GDP growth
will be allowed to aim for a small structural deficit whereas countries with a combination of
high debt and low potential growth will still be required to move towards a balanced budget
or a surplus.

The revised SGP also allows greater differentiation across countries concerning the
adjustment process towards the medium-term objective. The annual adjustment expressed in
structural terms, i.e. net of cyclical factors and one-off and other temporary measures can be
modulated vis-à-vis the reference value of 0.5 % of GDP per year, depending on prevailing or
expected economic conditions. In addition, a Member State that adopts major structural
reforms with verifiable positive effects on the long-term sustainability of its public finances
may temporarily deviate from its medium-term objective or the adjustment path towards it.

As regards the corrective arm of the reformed SGP, country-specific conditions are now given
more importance throughout the excessive deficit procedure. In particular, the procedure is no
longer linear. It allows for the repetition of certain steps in the light of adverse economic
events specific to the Member State. The new SGP also modifies the definition of ‘excessive
deficit’. In particular, the conditions under which an excess over 3 % of GDP can be
considered exceptional have become less stringent. Instead of being defined as an annual fall
of real GDP by at least 2 %, which has never been observed in any euro area country since the
SGP entered into force, the new SGP refers to a negative growth rate or the output loss
accumulated during a protracted period of very low growth relative to potential. This too will
require a country-specific assessment.

It is clear that the reform of the SGP pays less attention to the role of procedures and
institutions, an aspect which featured prominently in the reform debate among professional
economists. In particular, a significant part of the economic profession linked the lack of
enforcement to weaknesses in the governance structure of the EU fiscal surveillance, notably
the fact that large countries in breach of the SGP had a high degree of leverage in the Council.

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