Stability & Growth

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THE INEFFECTIVE & UNWORKABLE STABILITY & GROWTH PACT

Abstract

The paper presented provides a discussion and evaluation of the functioning of the fiscal discipline instrument; it was designed in the early 1990’s for inclusion in the Maastricht Treaty, refined in 1997 with the creation of the Stability & Growth Pact (hereafter, ‘SGP’), and reformed in 2005. Assuming that we need it for reasons rehearsed in literature, the SGP will be evaluated and discussed in relation to its effectiveness to date. Although case law is not studied extensively, a brief overview of the SGP crisis in 2003 will be provided, followed by a legal/economic analytical framework perspective with the SGP examined under the lens of soft and hard law primarily.

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With the legal principles exposing the economics behind the SGP, the rules and discretion debate is followed supporting evidence that the current framework has proved to be inadequate. The methodology continues to analyse the SGP framework with a particular focus on the economic crisis of Greece. The lessons illuminated from this particular case study will further provide possible recommendations to help the SGP become a more effective regime, in face of ageing populations and a need for growth enhancing forms.

1. Introduction

While monetary policy is delegated to the European Central Bank (ECB) who face a challenge of convincing speculators that they are serious about the maintaining of exchange rate stability and that they will not use the option of devaluing (Jacquet 1998), fiscal policy remains in the hands of national authorities. Member States (MS) should however, according to the Treaty on European Union (hereafter, Maastricht) comply with the principle of sound public finances. To ensure this, the Treaty presents a no bail-out clause which prohibits the ECB, and other nations of rescuing a MS in financial trouble. This was further protected by the introduction of the Stability & Growth Pact (SGP) which further specified rules and procedures.

A primary source of European Union law is provided for by the power-giving EU treaties which set broad policy goals and establish institutions that, amongst other things, can enact legislation in order to achieve these goals. The SGP is precisely this further legislation that is required to give force and credibility to the Treaty. The legislative acts of the EU may come in two forms; directives and regulations. In the case of the SGP, it consists of two council regulations 1466/97 and 1467/97 which are directly applicable and binding in all MSs without the need for any further domestic legislation.

The fundamental objective for the SGP is to identify excessive deficits and end them as soon as possible[1]. However, the SGP, in its original, reformed and current form is not effective. Whilst initiating debt and deficit cuts,

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