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

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ECOFIN had renamed the pact, the SGP. This was in response to the perception that EMU, or more specifically, the rush to meet the convergence criteria, was destroying jobs and creating unemployment. When ECOFIN was drafting the SGP, German Finance Minister Waigel wanted the fines to become automatic. However, when the final proposal was adopted, fines were only one of the possible recourses available for failure to stay within the 3 percent criteria. Further, assessment of a fine was left to the discretion of the Council rather than automatic. This was agreed to primarily appease the French, specifically President Jacques Chirac. It is another example of how often, through the existence of the EU, the French and German governments have bent over backward to support the other in order to preserve the primacy of the Franco-German relationship in EU matters. What is the SGP and what does it do? Formally, the SGP contains three elements: • A political commitment…to the full and timely implementation of the budget surveillance process…(which) ensures that effective peer pressure is exerted on a Member State failing to live up to its commitments. • Preventive elements which through regular surveillance aim at preventing budget deficits going above the 3% reference value….It foresees the submission by all Member States of stability and convergence programs, which are examined by the Council. The Regulation foresees also the possibility to trigger the early warning mechanism in the event a slippage in the budgetary position of a Member State is identified. 6
• Dissuasive elements which in the event of the 3% reference value being breached, require Member States to take immediate corrective action and, if necessary, allow for the imposition of sanctions. (http://europa.eu.int/comm/economy_finance/about/activities/sgp/sgp_en.htm) The SGP does provide a couple of possible exceptions for failing to stay within the 3 percent reference value: • It results from an unusual event outside the control of the Member State concerned and has a major impact on the financial position of the general government; • It results from a severe economic downturn (if there is an annual fall of real GDP of at least 2%). (http://europa.eu.int/comm/economy_finance/about/activities/sgp/edp_en.htm) The SGP also clarifies the procedure for the imposition of fines. Initially, a member state must make a non-interest-bearing deposit with the Commission equal to 0.2 percent of GDP plus a variable amount based on the size of the deficit. Each succeeding year, the Council may require an additional deposit up to a maximum of 0.5 percent of GDP. The deposit may be converted into a fine if, in the opinion of the Council, the excessive deficit has not been corrected after two years. Deficit and Debt Results (Insert Table 1 about here) Table 1 presents the government deficit or surplus as a percentage of GDP for the years 1998 through 2004. It is important to note that only the 12 countries which are members of the euro-zone are bound by the 3 percent reference value. Other member states would have to satisfy 7
Page 1 and 2: Submission Form Author’s Name: Af
Page 3 and 4: • Budgetary discipline: a governm
Page 5: (9) If a Member State persists in f
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
Page 15 and 16: • Debt rules. The argument here i
Page 17 and 18: with a subsequent report to the Eur
Page 19 and 20: especially on the part of the large
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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