Stability and Growth Pact

The Stability and Growth Pact (SGP) is an agreement, among all the 27 member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU). Based primarily on Articles 121 and 126 of the Treaty on the Functioning of the European Union,^[1] it consists of fiscal monitoring of member states by the European Commission and the Council of the European Union, and the issuing of a yearly Country-Specific Recommendation for fiscal policy actions to ensure a full compliance with the SGP also in the medium-term. If a member state breaches the SGP's outlined maximum limit for government deficit and debt, the surveillance and request for corrective action will intensify through the declaration of an Excessive Deficit Procedure (EDP); and if these corrective actions continue to remain absent after multiple warnings, a member state of the eurozone can ultimately also be issued economic sanctions.^[2] The pact was outlined by a European Council resolution in June 1997^[3] and two Council regulations in July 1997.^[4][5] The first regulation "on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies", known as the "preventive arm", entered into force 1 July 1998.^[4] The second regulation "on speeding up and clarifying the implementation of the excessive deficit procedure", sometimes referred to as the "dissuasive arm" but commonly known as the "corrective arm", entered into force 1 January 1999.^[5]

The purpose of the pact was to ensure that fiscal discipline would be maintained and enforced in the EMU.^[6] All EU member states are automatically members of both the EMU and the SGP, as this is defined by paragraphs in the EU Treaty itself. The fiscal discipline is ensured by the SGP by requiring each Member State, to implement a fiscal policy aiming for the country to stay within the limits on government deficit (3% of GDP) and debt (60% of GDP); and in case of having a debt level above 60% it should each year decrease with a satisfactory pace towards a level below. As outlined by the "preventive arm" regulation, all EU member states are each year obliged to submit a SGP compliance report for the scrutiny and evaluation of the European Commission and the Council of the European Union, that will present the country's expected fiscal development for the current and subsequent three years. These reports are called "stability programmes" for eurozone Member States and "convergence programmes" for non-eurozone Member States, but despite having different titles they are identical in regards of the content. After the reform of the SGP in 2005, these programmes have also included the Medium-Term budgetary Objectives (MTO), being individually calculated for each Member State as the medium-term sustainable average-limit for the country's structural deficit, and the Member State is also obliged to outline the measures it intends to implement to attain its MTO. If the EU Member State does not comply with both the deficit limit and the debt limit, a so-called "Excessive Deficit Procedure" (EDP) is initiated along with a deadline to comply, which basically includes and outlines an "adjustment path towards reaching the MTO". This procedure is outlined by the "dissuasive arm" regulation.^[7]

The SGP was initially proposed by German finance minister Theo Waigel in the mid-1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German economy's robust performance since the 1950s. The German government hoped to ensure the continuation of that policy through the SGP, which would ensure the prevalence of fiscal responsibility, and limit the ability of governments to exert inflationary pressures on the European economy. As such, it was also described to be a key tool for the Member States adopting the euro, to ensure that they did not only meet the Maastricht convergence criteria at the time of adopting the euro but kept on complying with the fiscal criteria for the following years.

The Excessive Deficit Procedure (EDP) - also known as the corrective arm of the SGP, was suspended via activation of the "general escape clause" during 2020-2023 to allow for higher deficit spending; first due to the Covid-19 pandemic arriving as an extraordinary circumstance,^[8] and later during 2022-2023 due to the Russian invasion of Ukraine having sent energy prices up, defence spending up and budgetary pressures up across the EU.^[9] Despite of the EDP suspension in 2020-2023, Romania still experienced the opening of an EDP in April 2020;^[10] but only because of existence of a deficit limit breach being recorded already for its 2019 fiscal year, which required corrective action across 2020-2024, to remedy a budgetary imbalance created before 2020.^[11]

16 out of 27 member states had a technical SGP criteria breach, when their 2022 fiscal results and 2023 budgets were analyzed in May 2023, but because those breaches were exempted due to the finding of temporary and exceptional circumstances - reflected by the activation of the general escape clause, no new EDPs were opened against those member states.^[12]

The EDP will be assessed again starting from May 2024, where each country will have their usual set of a "2024 National Reform Programme" and "2024 Stability or Convergence Programme" analyzed,^[13][14] with a compliance check of the 2023 fiscal result and 2024 budget with the existing 2019-version of the SGP rules; although only 3% deficit breaches will be evaluated - because no debt limit or debt reduction breach can trigger an EDP in 2024.^[15] The European Commission reasoned for its continued deactivation for another year of the debt limit or debt reduction rule in 2023-2024: "that compliance with the debt reduction benchmark could imply a too demanding frontloaded fiscal effort that would risk to jeopardise economic growth. Therefore, in the view of the Commission, compliance with the debt reduction benchmark is not warranted under the prevailing economic conditions."^[12]

In February 2024, the EU approved a revised set of SGP rules, that will introduce acceptance of a slower adjustment path towards respecting the deficit and debt limit of the SGP, and extend the maximum duration of an Excessive Deficit Procedure from four to seven years if certain reform requirements are respected. The new revised rules will be finally adopted by the European Parliament and Council of Ministers before the 2024 European Parliament election; and fully applied starting from the presented drafts for 2025 budgets.^[16][17][18] The first "national medium-term fiscal-structural plans" guided by the new revised fiscal rules, will cover the four-year period 2025-2028, and need to be submitted by each member state by 20 September 2024.^[19]