debate has ebbed and flowed. Below we outline three periods in the ‘voyage’ of the SGP.
First, we focus on some elements of the debate that took place ahead of the adoption of the
Maastricht Treaty in 1992 and the establishment of the SGP in 1996. Second, we look at the
first few years of the SGP when economic developments were beneficial and frictions within
the SGP were few. Third, we examine the later years when economic developments were less
favourable and procedural problems escalated, leading up to the crisis in late 2003 and later
on to the reform of the SGP in March 2005.
2.1. Designing, building and naming the ship: from Maastricht to a Stability and Growth
Pact
The debate before the Maastricht Treaty was signed in 1992 mainly revolved around the
question whether an optimal currency area was a pre-condition for a successful monetary
union or whether monetary integration itself could drive harmonisation.3 In the end, the
Maastricht Treaty was a compromise including a strict time schedule for the realisation of
Economic and Monetary Union (EMU), combined with strict (nominal) convergence criteria
to qualify for membership. As regards fiscal rules, there was an understanding that restrictions
on national fiscal policy were necessary, but some did not share the view that the rules written
into the Treaty were instrumental, for example Bean (1992).
After the economic recession in the early 1990s, budget deficits, debt levels and
unemployment soared and the Maastricht plan of a common currency seemed ever more
improbable, but in the mid-1990s the likelihood of EMU actually materialising increased.
However, Germany got cold feet as its domestic climate became more hostile to the idea of
EMU. The Germans’ fear was that once countries had passed the convergence tests and
entered EMU, their incentives to preserve the achieved budgetary discipline would evaporate.
To persuade Germany to give up the DM, more assurance that budgetary policies would
remain sound and stability-oriented also inside the EMU, especially on the part of those
members with a history of high inflation, deficits and debt, was required. In 1995, German
Minister of Finance Theo Waigel proposed a ‘Stability Pact for Europe’ where the 3 % of
GDP deficit objective (one of the convergence criteria for joining the euro) would become a
firm upper ceiling, sanctions for exceeding the reference value would be automatic and a new
2 A detailed description of the SGP goes beyond the purpose of this paper. A useful reference is Cabral (2001).
3 See for instance Eichengreen (1991) and De Grauwe and Vanhaverbeke (1991).
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