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

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continue the budgetary discipline of the convergence criteria after the beginning of Stage III. Not surprising this second issue was critically important to Theo Waigel, German Finance Minister under Chancellor Helmut Kohl. In response to the European Council’s request for a methodology to continue the budgetary discipline, ECOFIN proposed what eventually became known as the Stability and Growth Pact (SGP). The Stability and Growth Pact The genesis for the SGP is found in Article 104 of the TEU, which states in part: (1) Member States shall avoid excessive government deficits. (2) The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria: (a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless: either the ratio has declined substantially and continuously and reached a level that comes close to the reference value; or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value (b) whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace. (5) If the Commission considers that an excessive deficit in a Member State exists or may occur, the Commission shall address an opinion to the Council. 4
(9) If a Member State persists in failing to put into practice the recommendations of the Council, the Council may decide to give notice to the Member State to take…measures for the deficit reduction which is judged necessary by the Council… (11) As long as a Member State fails to comply with a decision taken in accordance with paragraph (9), the Council may decide…to impose fines of an appropriate size. (http://europa.eu.int.eur-lex/en/treaties/selected/livre223.html#anArt6). The reference values mentioned in parts 2 (a) and (b) of Article 104 above are the same as the criteria established under the budgetary discipline portion of the convergence criteria in Article 121 of the TEU, specifically, an annual budget deficit lower than 3 percent of GDP and a public debt not more than 60 percent of GDP, or at least approaching that value. It is important to note that at the time this discussion was occurring within ECOFIN, member states were desperately trying to satisfy the convergence criteria. As part of member states’ efforts to satisfy the convergence criteria several were cutting budgets in order to get their deficits below the magic 3 percent. As budget cuts resulted in less government hiring, fewer and smaller business subsidies, and lower expenditures on public works, unemployment inevitably increased. As budget cuts also resulted in less generous social welfare programs, unemployment became less congenial for many Europeans. These developments reinforced a popular perception that EMU itself caused unemployment and worsened the plight of the unemployed (Dinan, 1999, p. 470). There are a couple of interesting political side notes to the proposal that eventually became the SGP. Originally, the proposal was called the stability pact. However, when the European Council adopted the proposed agreement at the Dublin summit in December 1996, 5
Page 1 and 2: Submission Form Author’s Name: Af
Page 3: • Budgetary discipline: a governm
Page 7 and 8: • Dissuasive elements which in th
Page 9 and 10: is so strong that the British don
Page 11 and 12: hand, its rules are not strict enou
Page 13 and 14: states’ revenue failed to grow at
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Page 17 and 18: with a subsequent report to the Eur
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Page 21 and 22: • Take better account in Council
Page 25 and 26: References Begg, I. and Schelkle, W
Page 27: Martin, A. (2005). Blame the ECB, N

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

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