EMU SGP Rules | Economics Dissertations

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To what extent is the EMU hampered by inflexible SGP rules

1.0 Introduction: The Stability and Growth Pact (SGP)

The Stability and Growth Pact is designed to ensure sound public finances and acts as a pre-requisite in achieving long term economic growth. This economic growth can only be achieved through sound monetary and fiscal policies. The policies may come in the form of controlled government expenditures, price stability, optimal interest rates, exchange rates determination, manageable inflation rates and sustainable unemployment figures in the overall economy.

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The UK’s HM Treasury (2004), in its working paper, defines SGP as an important step in ensuring sustainable public finances to prevent high-debt countries from continuing to run high deficits and debt that could adversely affect all the members in the monetary union.

Deficits come when an institution, like the government, exceeds its expenditure targets beyond its budgetary limits or when revenue generated is lower than the expenses incurred. Such macroeconomic disturbances can only be controlled by appropriate reforms and by taking corrective measures.

However, when we are faced with a situation whereby monetary situation in one country greatly influences the macroeconomic situation in another country or a group of countries, as in the Economic and Monetary Union (EMU), it becomes a matter of concern. In the euro area, for example, the treaty explicitly states that European Central Banks (ECB) “should take corrective measures to bail out member states.

This intervention can only come by creating credibility in the monetary union and by introducing additional safeguards to bolster sustainability and minimise the risk of spill overs”. To prevent such cross-country spill over of such disturbances, The SGP represents a significant step forward to recognise the importance of long term budgetary discipline.

1.1 SGP – In Detail

Adopted in 1997, the Stability and Growth Model aims at providing concrete answers to concerns relating to budgetary discipline in the Economic and Monetary Union (EMU). The SGP provides treaty provision son fiscal discipline in EMU foreseen by articles 99 and 104. It came into complete force when the Euro as a common currency was launched. At the time of its formation the primary concern of SGP was to safeguard government finances as a means to strengthen the conditions for price stability and sustainable growth prospects to create employment opportunities.

In the Economic and Monetary Union, policy co-ordination and economic governance more generally is founded on the principle of an inter-governmental approach. For example, The Treaty and SGP provides for Excessive Deficit Procedure (EDP) which may be initiated if the government deficit exceeds the stipulated 3 present of the GDP or the government gross deficit exceeds 60 percent of the GDP. However, it also states that government deficit is not excessive if the excess over the 3 percent is exceptional and temporary and the deficit remains close to the reference value.

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