The Stability and Growth Pact: Pros and Cons

2444 Words Sep 25th, 2011 10 Pages
The Stability and Growth Pact: Pros and Cons

1. Introduction

Adopted in 1997, the Stability and Growth Pact (SGP) of the European Union (EU) has been subject to myriad criticisms, which have questioned its effectiveness and sustainability. This paper starts by describing the rationale behind its origination. Section 3 communicates its structure. Section 4 examines the reasons for its reform. Section 5 presents the main leverages and handicaps associated with its implementation. Section 6 concludes. This paper studies how well the SGP fulfills the role of a mechanism that regulates individual fiscal systems of the Member States, as a means of fortifying the European Monetary Union (EMU).

2. Raison d’être
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The MTOs grant the countries take structural reforms according to their social demands, such as pension reforms to fight against population ageing and its economic consequences. This adjusted rule of the SGP allows members more flexibility to invest in capital expenditures, by acknowledging medium and long-term fiscal problems facing them.

5. Resolutions attained and problems encountered

As interpreted by Annett, Decressin and Deppler (2005), the SGP was established to seek a double purpose: cultivating a centralized time-consistent fiscal policy within the members and promoting policy coordination among them.

The most problematic among the fiscal policies practiced by the countries are the politically-induced deficit biases. As an attempt to be re-elected, politicians promise lowering taxes and increasing public expenditures, which negatively affect fiscal policies by rising budget deficits. Another example would be a Member State’s excessive borrowing generating spillovers on the other members (Morris, Ongena and Schuknecht, 2006). The rules of SGP aim to control such actions that cause deficit distortions and deteriorate economic standing of the Eurozone.

In the absence of a concentrated fiscal policy that checks the individual decisions of the members, each country would be free to act however they desired without actually taking into account the negative externalities of their actions on

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