Stability and Growth Pact

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Heads of state and government agreed at the March 2005 Summit to revise the EU's Stability and Growth Pact reform. Under the revised rules, member states must still keep their public deficits under a 3% GDP/deficit ratio and their debts under a 60% GDP/debt ratio. 

However, the pact's rules have been made more 'flexible' across a range of areas. For example, member states will avoid an excessive deficit procedure (EDP) if they experience any negative growth at all (previously -2%), can draw on more "relevant factors" to avoid an EDP and will have longer deadlines if they do move into an EDP.

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Overview

The Stability and Growth Pact (SGP) was concluded by the European Council at the Dublin Summit in December 1996. It is a political agreement laying out the rules for the budgetary discipline of the member states. It is designed to contribute to the overall climate of stability and financial prudence underpinning the success of Economic and Monetary Union (EMU).

It builds on the convergence criteria, which member states have to fulfil in order to join the single currency. During initial negotiations leading up to the establishment of the pact, Germany was the main driving force pushing for more rigid rules.

The pact binds all parties to engage in the prompt implementation of the  excessive deficit procedure (EDP), should any of them fail to meet the agreements of the pact. The procedure is enforced when a member state is running a deficit on public expenditure over revenue, of over 3% of its gross domestic product (GDP) in any year. Additionally, governments may also not allow total government debt to exceed 60% of GDP. Member states are required to report the level of their debt to the Commission promptly, which in turn relays this information to the EcoFin Council and the Monetary Committee. 

If a country is found to be in serious breach of the protocol, the Commission can recommend that the Council take action against it. The EDP protects member states from action if their deficits "result 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" [an 'asymetric shock'] or "result from a severe economic downturn (if there is an annual fall of real GDP of at least 2%)".

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