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The reform and implementation of the Stability and Growth Pact

  • Richard Morris
  • Hedwig Ongena
  • Ludger Schuknecht

Fiscal rules are instrumental for restraining deficit and spending biases in euro area Member States that could threaten the smooth functioning of Economic and Monetary Union (EMU). Ideally, fiscal rules should combine characteristics such as sufficient flexibility to allow for appropriate policy choices with the necessary simplicity and enforceability to actually discipline government behaviour. The Maastricht Treaty and the Stability and Growth Pact established such a rules-based framework for fiscal polices in EMU. However, the implementation of the Pact was less than fully satisfactory. One year ago, the Pact was reviewed and a reformed version adopted which emphasises more flexible rules and procedures, including more explicit room for judgement and discretion than in its original form. While its proponents argued that these revisions would strengthen commitment and implementation of the rules, others emphasised the risk of weakening the EU fiscal framework. A year on from the SGP reform, this paper takes stock of how the EU fiscal rules have evolved and how they have been implemented from the Maastricht Treaty to the present day, including initial experiences with the implementation of the reformed Pact. The first indications are of a smoother and consistent implementation, but with consolidation requirements that are rather lenient while fiscal targets and projections point to only slow and back-loaded progress towards sound public finances in many countries. The assessment of the implementation of the revised rules is therefore mixed. It is of the essence that the provisions of the revised SGP be rigorously implemented in order to ensure fiscal sustainability. JEL Classification: E61, E62, H6.

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Paper provided by European Central Bank in its series Occasional Paper Series with number 47.

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Length: 49 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:ecb:ecbops:20060047
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  1. Wyplosz, Charles, 2002. "Fiscal Policy: Institutions versus Rules," CEPR Discussion Papers 3238, C.E.P.R. Discussion Papers.
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  8. Marín, José M., 2002. "Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline," Working Paper Series 0193, European Central Bank.
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