The Stability and Growth Pact: The appropriate fiscal framework for EMU

Developments in fiscal policies since the start of Economic and Monetary Union have time and again raised the question of whether the Stability and Growth Pact (SGP) provides an appropriate framework for fiscal policy coordination. Critics have argued that the SGP, in particular the set of rules specifying the application of the 3% deficit reference value of the Maastricht Treaty, is too rigid as it could force countries to restrain fiscal policies in difficult times and exacerbate cyclical volatility. Moreover, the SGP has been accused of inhibiting growth by limiting useful public expenditure (e.g. on investment). Supporters argue that the SGP provides a constructive, and indeed indispensable, framework for fiscal policies in Monetary Union. It is credited with securing stable and sustainable public finances within adequate bounds of flexibility. In the current dire state of public finances in many Member States and at the euro area level, this debate has reached a new peak.