Despite the clear consensus that emerged in the early 1990s over the need to formulate statistical rules to co-ordinate the multinational undertaking of EMU, the pact has been highly disputed since its inception, with critics and academics arguing especially fervently on the "arbitrary" selection of the three per cent threshold.
The Stability and Growth Pact is emerging from a major crisis after the Commission took the Council to the European Court of Justice on procedural grounds after the latter failed to take further action against France and Germany for persistent breaches of the pact's rules.
EU finance ministers reached a hard won deal on reforms to the Stability and Growth Pact at an extraordinary meeting in advance of the EU summit of heads of state and government on 22 and 23 March 2005.
In essence, big countries such as France and Germany have won concessions making the pact more 'flexible' in various parts, adding up to a considerable relaxation of the rules. In return, countries such as Austria and Netherlands have won references to "enhanced surveillance, peer support and peer pressure".
The two thresholds - 60% for the debt and 3% for the deficit - remain unchanged.
However, the following has changed:
Trigger for an excessive deficit procedure
No excessive deficit procedure will be launched against a member state experiencing negative growth or a prolonged period of low growth. Previously the exception was for countries in a recession defined as 2% negative growth, something which has been virtually unheard of among EU member states.
"Relevant factors" letting a country off an EDP
Member states recording a "temporary" deficit or one close to the 3% reference value will be able to refer to a series of "relevant factors" to avoid an excessive deficit procedure. Factors will include potential growth, the economic cycle, structural reforms (pensions, social security), policies supporting R&D plus medium-term budgetary efforts (consolidating during good economic times, debt levels, public investment).
Rather than referring to an exhaustive list of "relevant factors" as had been mooted at one stage, the deal sets out chapter headings. These will take the form of general principles whose application will be thrashed out between member states and EU institutions.
Leeway will be given where countries spend on efforts to "foster international solidarity and to achieving European policy goals, notably the reunification of Europe if it has a detrimental effect on the growth and fiscal burden of a member state".
The first part of this phrase will go some way to pleasing France, which failed to ensure that development aid and some military expenditure would be explicitly taken into account in its budgetary assessment. Germany will also be pleased as it wanted special treatment for what it regards as its high contribution to the EU budget and will no doubt try to justify this as part of efforts "to achieve European policy goals". Germany also appears to have got its way as regards the last part of the above text in that it is expected to cite the cost of German reunification.
The Council and Commission have recognised the importance of pension reforms in an ageing society by agreeing to give "due consideration" to the implementation of these reforms in their budgetary assessments relating to the excessive deficit procedure. They note that carrying out such reforms leads to a short-term worsening of public deficits but a long-term improvement in the sustainability (public debt) of public finances.
Extension of deadlines in connection with excessive deficit procedures
Countries will have two years (previously one) to correct an excessive deficit. This may be extended in cases of "unexpected and adverse economic events with major unfavourable budgetary effects occurring during the procedure". To benefit from these, countries must show proof that they have adopted the correction measures that were recommended to them.
Member states have committed to using unexpected fiscal receipts during periods of strong growth to reduce their deficits and debt.
Country-specific medium-term objectives
Medium-term objectives will be tailored to individual member states based on their current debt ratio and potential growth. This will vary from -1% of GDP for low debt/high potential growth countries to balance or surplus for high debt/low growth countries.
Reliability of statistics provided by member states
The Council wants to beef up Eurostat's resources, powers, independence and accountability. As a reaction to the Greek underreporting of statistics, it says that imposing sanctions on a member state "should be considered" when there is infringement of the obligations to duly report government data. The Commission unveiled a proposal to improve the reliable reporting of statistics on 22 December 2004.
Involvement of national parliaments in the process
Member states' governments have been called on to present stability/convergence programmes and Council opinions on these to their national parliaments.