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Critical Assessment As To Why, According To The Stability And Growth Pact, Member Countries Of The Eu Should Maintain Deficits Within 3% Of Their Gdp.

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European Business Issues

CORP 2502

Group Assignment:

Provide a critical assessment as to why, according to the Stability and Growth Pact, member countries of the EU should maintain deficits within 3% of their GDP.

By Michael Pearson P04285924


Kavon Bagheri P0427523x

10 February 2006

Adopted by the members of the European Union in 1997, the Stability and Growth Act is an agreement to facilitate and maintain the Economic and Monetary Union of the European Union by limiting budget deficits in countries which are part of the eurozone. A monetary union is where several countries have agreed to share a single currency among them, in the case of the EU, this is the Euro.

The pact was agreed upon to prevent over inflation from national governments passing to the European Central Bank (ECB), whose directive is to keep inflation under control. When the Stability and Growth Pact was drawn up, the leading countries that initially created the European Monetary Union(the single European currency-the Euro), such as Germany, were concerned that some countries would get round the rigorous monetary policy of the ECB by increasing government spending of public money within their own country which would create large budget deficit. (A budget deficit is when a government spends more money than in takes in through taxes. This deficit will eventually need to be paid by through increased taxation or seigniorage) The Stabilty and Growth Pact prevents this over spending by limiting each country to a budget deficit within 3% of their annual Gross Domestic Product (GDP is the total value of goods and services produced within a country in a year. It can be used as an indicator of the economic productivity from year to year and can suggest the standerd of living for the particualr country).

The Stability and Growth act consists of three elements to be imposed. These essential fundamentals are as follows:

„h A formal political commitment by each of the parties involved (this includes all of the European Union member states, the commission and the EU council) to fully implement a surveillance process to monitor the level of deficit of each member state. This resolution was agreed upon by the Amsterdam European Council of June 17, 1997. This political agreement allows other member states of the European Union to apply pressure onto other member states failing to live up to its commitments of keeping a deficit within 3% of its Gross Domestic Profit (GDP).

„h A preventative system of surveillance to avert budget deficits going above the 3 %. The Council Regulation reinforces budget checks and the overall coordination of economic policies. It also receives a submission of ÐŽ§stability and convergence programmes from each member state to identify any significant exciding of the 3% and discover this at an early stage so that its effect is minimised.

„h If a member state of the European Union exceeds the 3% reference value, the member states take immediate action to correct the fault and, if required, allow the implications of suitable sanctions.

The main aim of the Stability and Growth Pact is to enforce fiscal discipline upon the member states of the European Union. This is to ensure that governments kept sound finances as a means to strengthening the conditions for price stability and strong and sustainable growth which promotes the creation of more jobs, lowering unemployment. The Strength and Stability Pact was also created as it was recognised that the loss of the exchange rate instrument, between those countries that adopted the single European Union, would require the need of economic stabilisers at national level to help economies adjust to external environmental factors. The reasoning behind the core commitment of the Pact was to ensure that national budgetary policies supported stability oriented monetary policies.

Many European Union member states which have signed up to and agreed with the Stability and Growth Pact are now unhappy with being limited with its public spending ability as it forced them to maintain a deficit of three percent or lower in relation to its gross national product. They fell that the pact is too ridged and doesnÐŽ¦t allow for extenuating circumstances which requires a government to spend more within its country. Italian Prime Minister Silvio Berlusconi, facing a downturn in the economy back home said he would ÐŽ§put a great fight to get the pact relaxedЎЁ (BBC News Online). This would allow the Italian government to increase spending to try and reignite Italian businesses and to stop the downturn in the nationÐŽ¦s economy.

In March 2005 a conference of European Finance Ministers was called in Brussels to discuss the Stability and Growth Pact as a number of countries, including France and Germany who initially promoted the Pact and the limit it set had broken the 3% limit in the three previous years. Smaller nation states Netherlands and Austria were unhappy that this was allowed to happen and they felt it was unfair as the German and French governments were unpunished, neither sanctioned nor fined, by the European Union. This has led to some annalists believing the Pact as a whole was doomed and would be replaced in the future

The Stability and Growth Pact has attracted a lot of negative attention since the idea was first suggested by German Finance Minister, Mr. Waigel, in late 1995. ÐŽ§In the last few years the Stability and Growth Pact has ceased to be an effective constraint on fiscal policy in EU countries.ЎЁ (Stability and Growth Pact Reform,, Accessed 6th February 2006)

As with many things in life, there is not a unanimous view on the Pact. For some it is thought of as an unnecessary restriction, ÐŽ§The Stability and Growth Pact is under heavy fire. Even the President of the European Commission recently characterised the SGP as stupid.ЎЁ (Section: Issue 8 - European Integration ÐŽV A step towards a new global order,, Accessed 6th February 2006). For others the Pact is necessary but requires further development and strengthening, ÐŽ§Many have, therefore, been claiming for a revision of the rules governing the stability pact.ЎЁ(What stability pact for Europe?,, Accessed 6th February 2006). And finally there are those


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