Between Growth and Stability

Between Growth and Stability

The Demise and Reform of the European Union’s Stability and Growth Pact

Edited by Lelia Simona Talani and Bernard Casey

Combining economic and political science perspectives, this timely and important book describes and analyses the circumstances and events leading to the demise and subsequent reform of the Stability and Growth Pact (SGP).

Chapter 4: Bringing Domestic Pressures Back into the Budget: Germany’s Stability Pact and the New Incentive Structure in EMU

Benedicta Marzinotto

Subjects: economics and finance, public finance


Benedicta Marzinotto INTRODUCTION1 It is generally recognized that the proposal and approval in 1997 of the Stability and Growth Pact (SGP), an institutional device aimed at guaranteeing fiscal discipline even after Economic and Monetary Union (EMU) had started its operation, were clear-cut German inputs into the EMU design process (Dyson and Featherstone, 1999; Stark, 2001). In this light, it is certainly surprising that Germany has been the first large country to breach the 3 per cent deficit target imposed by the pact and be subject to the ensuing excessive deficit procedure in November 2002 (European Commission, 2002b).2 Yet the political leverage of the German representation in the ECOFIN Council was such that EU institutions decided to suspend the procedure in November 2003. The period that followed was characterized by the hectic effort to address the obvious shortcomings of the SGP, and of its implementation and enforcement (Pisani-Ferry, 2002), so as to avoid financial markets reacting with a vote of mistrust against the pact, which in fact never happened (see Chapter 3). The result of this long reflection was the approval of the Stability Pact reform in March 2005. The new version of the pact asserts that national ownership of fiscal policy is to be respected and that any evaluation of EMU countries’ stance with regard to the pact needs to take account of country-specific circumstances (Council of the European Union, 2005). Through this reform, two objectives have been achieved. On the one hand, the...

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