Theory, Evidence and Institutions
The Stability and Growth Pact (SGP) has been the most contentious element of EMU. There have been proposals to reform it ever since it was adopted by the Amsterdam European Council in June 1997. The debate accelerated in 2002 under the pressure of unfavourable budgetary developments in some euro-area countries. The insuﬃcient ﬁscal consolidation of the previous years and the cyclical downturn pushed the deﬁcits of several countries towards or above 3 per cent of GDP. In November 2002 the Commission issued a Communication on ‘Strengthening the co-ordination of budgetary policies’ which outlined some possible changes in interpretation, mostly focused on the issue of the medium-term budgetary targets. The ECOFIN Council decided to leave the rules unchanged while mentioning the need to put more emphasis on sustainability and the pace of debt reduction and stressing the need to avoid pro-cyclical policies, especially when growth conditions are favourable. The debate illustrated just how diﬃcult it would be to reach agreement on any signiﬁcant reform of the Pact. The pace of events quickened in November 2003 when the ECOFIN Council decided not to follow the European Commission’s recommendations to apply the excessive deﬁcit procedure to France and Germany. However, the fact that several Member States supported the Commission threw the diﬀerences between the European institutions into sharp relief. The Commission took the case to the European Court of Justice which, in July 2004, annulled the ECOFIN Council conclusions. It also ruled, however, that the Council was...
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