It Is Broken. Can It Be Fixed? A Look at the European Union's ...

The Commission’s proposals were forwarded to ECOFIN which met in February 2005 in
an effort to reach agreement prior to the March summit of the European Council. Perhaps not
surprisingly, the biggest sticking point evolved between the larger member states which wanted
greater flexibility while the smaller member states wanted the existing budgetary discipline to be
upheld. For example, Hans Eichler, Germany’s finance minister, proposed that member states
breaching the 3 percent reference value be spared disciplinary measures unless they had
committed serious policy errors.
Eichler’s boss, Chancellor Gerhard Schroeder, had called for greater national sovereignty
over economic policy and a diminished role for the Commission. This was summarily rejected
by Karl-Heinz Grasser, Austria’s foreign minister, as well as, interestingly enough, by the
Bundesbank, Germany’s central bank, which indicated that higher interest rates for the euro-zone
were possible if member states abandoned the fiscal discipline required under the SGP.
The final step in the reform process fell to the European Council meeting in Brussels in
March 2005. The Council acknowledged that in effect, the SGP was broken by stating that “the
reform aims at better responding to the shortcomings experienced so far through greater
emphasis to economic developments and an increased focus on safeguarding the sustainability of
public finances” (European Council, 2005, p. 22). The report went on to suggest five areas ripe
for improvement:
• Enhance the economic rationale of the budgetary rules to improve their credibility and
ownership.
• Improve ‘ownership’ by national policy makers.
• Use more effectively periods when economies are growing above trend for budgetary
consolidation in order to avoid pro-cyclical policies.
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