Stability and Growth Pact (SGP)
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- Legislation that limits the size of EMU members’ government deficits by maintaining the minimum 3 percent deficit to GDP ratio rule of the Maastricht treaty.
- This legislation is in place to overcome the moral hazard of budgetary positions in a monetary union, as well as enforce stability and to prevent deficit biases.
- If a member violates the deficit to GDP restriction put in place by the SGP, it could face a series of fines from the other members.
- The SGP was not successful in preventing deficits from exceeding the 3 percent threshold.
- By 2003 France, Germany, Italy, Portugal, and Greece had all violated the SGP (as well as the Netherlands by 2004)
- Under intense pressure from the offending members, the SGP was suspended in 2003 and no fines were issued for excessive deficits.
- In 2005 a revised Stability and Growth Pact was introduced.
- The new rules allowed deficits to be temporarily larger than the 3 percent deficit threshold.
- The focus turned toward medium term budgetary objectives.
- In this new arraignment, if the medium term budget (say a 5 year budgetary plan) called for a slightly larger than 3 percent deficit to GDP ratio this year in order to obtain a smaller deficit to GDP ratio in the years to come, the initial deviation from the threshold would be tolerated.
- Deficit positions have improved under the revised SGP.
- The ability of the revised SGP to keep deficit positions in line is still a topic of debate. Its efficacy will be determined as Europe begins to address its looming budgetary problems.
The following chart illustrates compliance to the deficit rules under the Maastricht treaty (1991-1999), the SGP (1999-2003), and the revised SGP (2005-present).
Note: A negative net lending position means the government is running a budget deficit, while a positive net lending position means the government is running a budget surplus.