Stability and Growth Pact Reform: A Missed Opportunity

July 01, 2005

News

01/07/2005

 

Stability and Growth Pact Reform: A Missed Opportunity

Marc Coleman (Michael Smurfit Graduate School of Business)

Embargo: Friday July 1st 2005 at 00.01a.m.



Article appearing in the forthcoming Quarterly Economic Commentary, Summer 2005



This article argues that the recent reform of the Stability and Growth Pact was a missed opportunity to solve both the economic and political difficulties that have surrounded the Pact since its effective suspension in November 2003 when procedures against both France and Germany were set aside.

 

 

  • This paper argues that although dealt a blow by the developments of November 2003, the Pact’s credibility could have been largely restored by exploiting the subsequent event of EU enlargement and the need it created to change some of the Pact’s economic features.
  • The Pact’s emphasis on punishing deficits and its non-implementation in relation to debt made it anomalous in a post-enlargement EU.
  • For high debt countries the deficit criteria should continue to have been implemented as deficits may contribute to rising debt burdens. This more lenient approach should have been compensated for, by removing additional provisions for exemptions that were ambiguous and open to abuse.
  • The challenge of Pact reform was fivefold

 

  • To implement the Pact more forcefully against high debt countries
  • To exempt low debt countries from its central deficit provisions
  • To make its implementation more independent and transparent.
  • To make exemption from sanction for high debt countries in breach of the deficit criteria easier to obtain, but more transparent and thereby less open to manipulation.
  • To stress the importance of EU enlargement in driving reform, rather than on the events of November 2003 in order to ensure reform was perceived as credible and taken seriously.
  • The actual reforms agreed have created the leniency required for lower debt countries, however there is no counterbalancing strictness against high debt countries.
  • Central institutional weaknesses of the Pact remain unresolved and its credibility remains in doubt given that its reform is conceptually traceable to political requirements related to events of November 2003.
  • The architecture of EMU, designed to ensure future fiscal stability and sustainability of the Euro Zone, has been considerably weakened.