Stability and Growth Pact

economic-dictionary

The Stability and Growth Pact is a set of rules implemented in the European Union (EU).Its objective is to prevent the negative consequences of certain economic policies, mainly in the fiscal area.

In general, the rules of this pact are intended to prevent public budgets from running into excessive deficits. In addition, it is intended that the public debt does not represent a high burden for the country.

Objectives of the Stability and Growth Pact

Among the objectives of the pact are:

  • EU members rethink their medium-term budget targets every three years. Although a government can do it more frequently if the country is facing a structural reform with a great impact on public finances.
  • A benchmark for spending was established. According to this indicator, increases in public spending that go beyond the country's medium-term potential economic growth rate must coincide with measures that allow the treasury to increase revenue.
  • The European Commission provides advice to the governments of the EU so that they can meet their medium-term goals.

History of the Pact

The Stability and Growth Pact is made up of a resolution of the European Council (adopted in 1997) and two Council regulations, dated July 7, 1997. One of them referred to the supervision of budgets, and the other that detailed the application of excessive deficits.

These two regulations were modified in 2005, after debates over their implementation. Then, with the economic and financial crisis in 2008, deficiencies were revealed that led to a rethinking of the regulatory framework in force at that time.

Thus, the EU strengthened its economic governance through eight regulations and an international treaty. Among them, the following stand out:

  • A more comprehensive monitoring system was incorporated in order to detect problems such as real estate bubbles or reduced competitiveness in time.
  • A new control cycle was agreed for the Eurozone with the presentation of the draft budget plans of the countries to the European Commission each autumn. Although an exception is made for nations that have macroeconomic adjustment programs.
  • The 2012 Stability, Coordination and Governance Treaty ("budget pact") was signed, introducing tougher fiscal measures than the original Stability and Growth Pact.

Furthermore, in January 2015, the European Commission published guidelines for the implementation of the existing rules in the framework of the Stability and Growth Pact.

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