Commission’s proposals:
1) Revising Stability and Growth Pact
2) Preventing and Correcting
macroeconomic imbalances
Lecture 5
LIUC 2010
The Stability and Growth Pact (SGP)
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The SGP is a rule-based framework for the
coordination of national fiscal policies in
the economic and monetary union (EMU).
 It was established in 1997 as an instrument
to reinforce the Treaty. Revised in 2005
 The Pact consists of a preventive and a
dissuasive arm.
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The Pact preventive arm
 MS must submit annual Stability or
Convergence programmes, showing
how they intend to achieve or safeguard
sound fiscal positions in the medium
term, taking into account the impending
budgetary impact of aging population.
 The Commission assesses these
programmes and the Council gives its
Opinion on them.
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The medium-term budgetary objective (MTO)

While the Treaty defines reference values for deficit and debt,
the SGP defines specific budget target for the medium-term.
 The MTO represents the budgetary position that safeguards
against the risk of breaching the 3% of GDP and ensures the
long-term sustainability of public finances
 In the original SGP, all Member States were expected to pursue
the attainment of a budgetary position close-to-balance or in
surplus (CTBOIS) in the medium-term.
 The reform of the SGP in 2005 clarified that MTO should be
interpreted in structural terms (cyclically adj and net of oneoff measures) and differentiated to take into account country
specificities : public debt, potential growth, and implicit
government liabilities associated with rising expenditure
due to ageing populations
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Stability and convergence programmes (SCP)
The SCP must contain the following information:
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The MTO;
the adjustment path towards the MTO and the expected path of
the debt ratio;
the underlying economic assumptions;
policy measures to achieve the programme objectives;
an analysis of how changes in the main assumptions would affect
the budgetary and debt position;
the medium-term monetary policy objectives and their
relationship to price and exchange rate stability (for non-euroarea countries only)
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Stability and convergence programmes (cont.)
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The Council examines the programmes at the beginning of
each year and delivers an opinion based on assessments by
the Commission and the Economic and Financial
Committee (EFC).
On the basis of this analysis, the Council opinion may
suggest policy action to be taken by the country in
question.
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The Pact dissuasive arm –
The Excessive Deficit Procedure (EDP)

The EDP is established in the Treaty and specified
in the SGP legislation.
 The EDP is triggered by the deficit breaching the
3% of GDP threshold of the Treaty.
 If it is decided that the deficit is excessive in the
meaning of the Treaty, the Council issues
recommendations to the Member States
concerned to correct the excessive deficit and
gives a time frame for doing so.
 Non compliance with the recommendations
triggers further steps in the procedures, including
for euro area Member States the possibility of
sanctions.
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SGP: the preventive arm, a new proposal
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Annual expenditure growth should not exceed a prudent
medium-term rate of growth of GDP, unless the MTO has been
attained or the excess is compensated by measures on the
revenue side. The essential aim is that to prevent that revenue
windfalls are spent rather than being allocated to debt reduction.
Failure to respect the agreed principle will make the concerned
Member State liable to a warning from the Commission and, in
case of a persistent and/or particularly serious infraction, a
Council recommendation to take corrective action, on the basis
of Article 121 of the Treaty.
For euro area members, such a recommendation would be
backed by an enforcement mechanism in the form of an interestbearing deposit amounting to 0.2% of GDP.
A 'reverse voting' mechanism is foreseen for the imposition of
the deposit: on proposal by the Commission, the deposit would
become due on the issuance of the recommendation by the
Council, unless the Council within ten days decides the contrary
by qualified majority. The deposit would be returned with
accrued interest once the Council considers that the deviation is
corrected.
SGP: the corrective arm, a new proposal
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The debt criterion of the Excessive Deficit Procedure (EDP) is to be
made operational, Specifically, for countries with a debt-to-GDP ratio
above 60% the ratio reduced over the previous three years at a rate
of the order of one-twentieth per year. If that is not the case, the
decision to place a country in excessive deficit would by no means
be automatic and still take into account all relevant factors, such as
whether very low nominal growth is hampering debt reduction as well
as risk factors linked to the structure of debt, private sector
indebtedness and implicit liabilities related to ageing.
Enforcement is strengthened by introducing a 'reverse voting'
mechanism as well as a new set of financial sanctions for euro-area
Member States, which would apply much earlier in the process
according to a graduated approach.
A non-interest bearing deposit amounting to 0.2% of GDP would
apply upon the decision of placing a country in excessive deficit. This
would be converted into a fine in case of non-compliance with the
initial recommendation to correct the deficit.
Further non-compliance would result in an increase of the fine, in line
with the already existing provisions in the SGP.
To reduce discretion in the enforcement, the procedure of 'reverse
voting' mechanism is foreseen for the imposition of the new
sanctions in connection with the successive steps of the EDP.
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Preventing and correcting macroeconomic imbalances
– The Alert Mechanism through a scoreboard
– Surveillance would start with an alert mechanism that
aims at identifying Member States with potentially
problematic levels of macroeconomic imbalances. The
alert mechanism would consist of a scoreboard
complemented by expert analysis.
– The scoreboard would be composed of a set of
indicators. Possible indicators would most likely include
both external (e.g. current accounts, real effective
exchange rates) and internal ones (e.g. private and
public sector debt).
– The composition of the scoreboard may evolve over
time due to changing threats to macroeconomic
stability or advances in data availability.
– Alert thresholds would be defined and announced for
each indicator. The thresholds should be seen as
indicative values which would guide the assessment
but should not be interpreted in a mechanical way.
They should be complemented by economic judgment
and country-specific expertise.
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The excessive imbalance procedure (EIP) applying to EU Member
States
 When the alert mechanism points to severe imbalances in a Member
State, the Council, on a recommendation from the Commission, may
adopt recommendations declaring the existence of an EIP and
recommending the Member State concerned to take corrective action
within a specified deadline.
 On the basis of a Commission recommendation, the Council will
conclude by the expiration of the initial deadline whether or not the
Member State concerned has taken the recommended corrective
action. Three outcomes are possible:
– If the Member State concerned has taken appropriate action and
the Member State is no longer experiencing excessive imbalances,
the EIP would be closed;
– If the Member State concerned has taken appropriate action, but
due the possibly long lags between adoption of corrective action
and its effect on the ground, imbalances are not yet corrected, the
procedure will be placed in abeyance (the Member State is making
satisfactory progress with corrective action). The Member State
concerned would then be subject to periodic reporting and
surveillance
– If the Member State concerned has taken insufficient action, the
Council would issue revised recommendations, Repeated noncompliance with this second set of EIP recommendations may lead
to sanctions for euro-area Member States.
Annex 1 - The Broad Economic and Policy
guidelines (BEPGs)
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The 1993 Treaty of Maastricht first introduced a system
for coordinating the economic policies of EU Member
States. ‘Member States shall regard their economic policies
as a matter of common concern and shall co-ordinate them
within the Council’.
The BEPGs are adopted by the Council as a reference
document guiding the conduct of the whole range of
economic policies in the MSs and the EU.
They take into account the particular circumstances of each
Member State and the different degree of urgencies of
measures.