Stability and Growth Pact

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Forecasted fiscal compliance of EU member states (debt-to-GDP criterion)

The Stability and Growth Pact (SGP) is an agreement, among the 28 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[1] of the Treaty on the Functioning of the European Union, it consists of fiscal monitoring of members by the European Commission and the Council of Ministers, and the issuing of a yearly recommendation for 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, the Member State can ultimately be issued economic sanctions.[2] The pact was outlined by a resolution and two council regulations in July 1997.[3] 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", known as the "dissuasive 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 decline 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 Ministers, 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's), 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 do 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 strong 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 to comply with the fiscal criteria for the following years.


The Pact has been criticised by some as being insufficiently flexible and needing to be applied over the economic cycle rather than in any one year.[8] They fear that by limiting governments' abilities to spend during economic slumps it may hamper growth. In contrast, other critics think that the Pact is too flexible; economist Antonio Martino writes: "The fiscal constraints introduced with the new currency must be criticized not because they are undesirable—in my view they are a necessary component of a liberal order—but because they are ineffective. This is amply evidenced by the “creative accounting” gimmickry used by many countries to achieve the required deficit to GDP ratio of 3 percent, and by the immediate abandonment of fiscal prudence by some countries as soon as they were included in the euro club. Also, the Stability Pact has been watered down at the request of Germany and France."[9]

Some remark that it has been applied inconsistently: the Council of Ministers failed to apply sanctions against France and Germany, while punitive proceedings were started (but fines never applied) when dealing with Portugal (2002) and Greece (2005). In 2002 the European Commission President (1999–2004)[10] Romano Prodi described it as "stupid",[11] but was still required by the Treaty to seek to apply its provisions.

The Pact has proved to be unenforceable against big countries such as France and Germany, which were its strongest promoters when it was created. These countries have run "excessive" deficits under the Pact definition for some years. The reasons that larger countries have not been punished include their influence and large number of votes on the Council of Ministers, which must approve sanctions; their greater resistance to "naming and shaming" tactics, since their electorates tend to be less concerned by their perceptions in the European Union; their weaker commitment to the euro compared to smaller states; and the greater role of government spending in their larger and more enclosed economies. The Pact was further weakened in 2005 to waive France's and Germany's violations.[12]

The pact violations by France and Germany were seen as green light for Portugal and Greece to violate the pact. This exacerbated the Eurozone crisis, the very scenario the pact and the convergence criteria were designed to prevent.

Reform 2005[edit]

In March 2005, the EU Council, under the pressure of France and Germany, relaxed the rules; the EC said it was to respond to criticisms of insufficient flexibility and to make the pact more enforceable.[13]

The Ecofin agreed on a reform of the SGP. The ceilings of 3% for budget deficit and 60% for public debt were maintained, but the decision to declare a country in excessive deficit can now rely on certain parameters: the behaviour of the cyclically adjusted budget, the level of debt, the duration of the slow growth period and the possibility that the deficit is related to productivity-enhancing procedures.[14]

The pact is part of a set of Council Regulations, decided upon the European Council Summit 22–23 March 2005.[15]

Reform changes of the preventive arm[16]
  • Country-specific Medium-Term budgetary Objectives (MTO)'s: Previously throughout 1999-2004 the SGP had outlined a common MTO for all Member States, which was "to achieve a budgetary position of close to balance or in surplus over a complete business cycle". After the reform, MTOs will now be calculated to country-specific values according to "the economic and budgetary position and sustainability risks of the Member State", based upon the state's current debt-to-GDP ratio and long-term potential GDP growth, while the overall objective over the medium term is still "to achieve a budgetary position of close to balance or in surplus over a complete business cycle". No exact formula for the calculation of the country specific MTO was presented in 2005, but it was emphasized the upper limit for the MTO should be at a level "providing a safety margin towards continuously respecting the government's 3% deficit limit, while ensuring fiscal sustainability in the long run". In addition it was enforced by the EU regulation, that the upper MTO limit for eurozone states or ERM II Member States should be: Max. 1.0% of GDP in structural deficit if the state had a combination of low debt and high potential growth, and if the opposite was the case - or if the state suffered from increased age-related sustainability risks in the long term, then the upper MTO limit should move up to be in "balance or in surplus". Finally it was emphasized, that each Member State has the task to select its MTO when submitting its yearly convergence/stability programme report, and always allowed to select its MTO at a more ambitious level compared to the upper MTO limit, if this better suited its medium-term fiscal policy.
  • Minimum annual budgetary effort - for states on the adjustment path to reach its MTO: All Member States agreed, that fiscal consolidation of the budget should be pursued "when the economic conditions are favourable", which was defined as being periods where the actual GDP growth exceeded the average for long-term potential growth. In regards of windfall revenues, a rule was also agreed, that such funds should be spend directly on reduction of government deficit and debt. In addition a special adjustment rule was agreed for all Eurozone states and ERM-II member states being found not yet to have reached their MTO, outlining that they commit to implement yearly improvements for its structural deficit equal to minimum 0.5% of GDP.
  • Early-warning system: The existing early-warning mechanism is expanded. The European Commission can now also issue an "opinion" directed to member states, without a prior Council involvement, in situations where the opinion functions as formal advice and encouragement to a Member State for realizing the agreed adjustment path towards reaching its declared MTO. This means that the Commission will not limit its opinon/recommendations only to situations with an acute risk of breaching the 3% of GDP reference value, but also contact Member States with a notification letter in cases where it finds unjustified deviations from the adjustment path towards the declared MTO or unexpected breaches of the MTO itself (even if the 3% deficit limit is fully respected).
  • Structural reforms: To ensure that implementation of needed structural reforms will not face disincentives due to the regime of complying with the adjustment path towards reaching a declared MTO, it was agreed that implementation of major structural reforms (if they have direct long-term cost-saving effects - and can be verified to improve fiscal sustainability over the long term - i.e. pension scheme reforms), should automatically allow for a temporary deviation from the MTO or its adjustment path, equal to the costs of implementing the structural reform, in the condition that the 3% deficit limit will be respected and the MTO or MTO-adjustment path will be reached again within the four-year programme period.
Reform changes of the correcting arm[16]
  • Definition of excessive deficits:
  • Deadlines and repetition of steps in the excessive deficit procedure:
  • Taking into account systemic pension reforms:
  • Focus on debt and fiscal sustainability:
Reform changes of the economic governance[16]
  • Fiscal governance:
  • Statistical governance:

Reform 2011 and hints to the new European economic governance[edit]

Main articles: Euro Plus Pact and Sixpack (EU)

In March 2011, following the 2010 European sovereign debt crisis, the EU member states adopted a new reform under the Open Method of Coordination, aiming at straightening the rules e.g. by adopting an automatic procedure for imposing of penalties[specify] in case of breaches of either the deficit or the debt rules.[17][18] The new "Euro Plus Pact" is designed as a more stringent successor to the Stability and Growth Pact, which has not been implemented consistently. The measures are controversial not only because of the closed way in which it was developed but also for the goals that it postulates.

The four broad strategic goals are:

  • fostering competitiveness
  • fostering employment
  • contributing to the sustainability of public finances
  • reinforcing financial stability.

An additional fifth issue is:[19]

  • tax policy coordination

Overall - looking at the new European economic governance framework, it seems to be in front of a "mixture" of different acts adopted at various territorial levels and characterized by a different legal nature. In particular, three acts shall be ascribed to the international norms’ realm: (1) the European Financial Stability Facility (EFSF), created by the Euro area Member States following the decisions taken on 9 May 2010 within the framework of the ECOFIN Council. Particularly, the EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to the Eurozone’s macro-economic adjustment programme ; (2) the Treaty establishing the European Stability Mechanism (ESM) was signed on 2 February 2012, after a decision taken by the European Council (December 2010). Designed as a permanent crisis resolution mechanism for the countries of the Euro area, the ESM issues debt instruments in order to finance loans and other forms of financial assistance to the involved Member States; finally, (3) the Treaty on Stability, Coordination and Governance (TSCG), whose final version was signed on 2 March 2012 by the leaders of all euro area members and eight other EU member states, and entered into force on 1 January 2013. The TSCG has been commonly labeled "Fiscal Compact ", originally intended to promote the launch of a new international economic cooperation enforced by those EU Member States which are also part of the so-called.

Strictly speaking, those mentioned are "legal" mechanisms which have been newly introduced, and therefore have to be distinguished from the measures instead representing an adaptation of pre-existing rules. The latter are "customary" EU secondary norms contributing to the formation of the legal structure underlying the new European economic governance:

- in the case of the so-called "Six-Pack", five regulations and one directive are at stake as of 13 December 2011, with a view to strengthening the Stability and Growth Pact (SGP) – that is a rule-based framework for the coordination of national fiscal policies in the European Union whose details would be mentioned below. - given the higher potential for spillover effects of budgetary policies in a common currency area, in November 2011 the Commission proposed two further regulations to strengthen euro area budgetary surveillance. This reform package, the so-called "Two-Pack ", entered into force on 30 May 2013 in all Euro area Member States. The new measures were meant to increase transparency on their budgetary decisions and stronger coordination within the 2014 budgetary cycle, as well as to recognize the special needs of Euro area Member States under severe financial pressure . - the "Euro Plus" pact, agreed in Spring 2011 by the 17 Member States of the Euro area (and joined by Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania), is intended to reinforce the economic pillar of the monetary union and achieve a new quality of economic policy coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence reinforcing social market economy

- the "European Semester" has been introduced by the ECOFIN deliberation dated 7 September 2010. It was specifically meant to better an ex ante coordination of economic and budget policies of member states – integrating the specifications on the implementation of the Stability and Growth Pact . The latter governs fiscal discipline in the EU, with the purpose of ensuring fiscal discipline in the Union within Europe2020. Although the Pact applies to all EU members, it has stricter enforcement mechanisms for Euro area members:

-"the preventive arm" is part of the European Semester. In particular – every year in April, Euro area member states submit Stability Programmes, while member states outside the euro area submit Convergence Programmes. These documents outline the main elements of the member states’ budgetary plans and are assessed by the Commission. An important part of the assessment addresses compliance with the minimum annual benchmark figure set for each individual country’s structural budget balance . Based on its assessment on the Stability and Convergence Programmes, the Commission draws up country-specific recommendations on which the Council adopts opinions in July. These include recommendations for appropriate policy actions. Furthermore, the Council adopts recommendations on economic policies that apply to the euro area as a whole.

-the "corrective" part entails the Excessive Deficit Procedure (EDP). This procedure is triggered if a member state's budget deficit exceeds 3% of GDP. When the Council decides that the deficit is excessive, it makes recommendations to the member state concerned and sets a deadline for bringing the deficit back below the reference value. The Council can grant extensions to this deadline if it is found that the country concerned has made good progress in implementing the initial recommendations but has not been able to fully correct its deficit because of an exceptional economic context. When it addresses decisions and recommendations to euro area member states, only euro area ministers have the right to vote.

Before the establishment of those measures, however, the coordination of economic and employment policies still went through the ECOFIN Council’s guidelines – which were established on a triennial basis.

Member states by SGP criteria[edit]

The deficit and debt criterion is applied to both Eurozone and non-Eurozone EU member states.[20] Data in the table are for the fiscal year 2011, being published as part of the European Commission's economic forecast in May 2012. And the past years with SGP breaches, were identified by the annexed table 53B and 55B from the report.[21]

  SGP criteria not fulfilled
Fiscal data for 2011 Budget deficit to GDP[21] Debt-to-GDP ratio[21] Breaches of the
deficit/debt rule
(since 1998)[21]
Deadline for
with SGP[22]
Reference value max. 3.0% max. 60.0% (or if above: declining towards 60%)
 Austria 2.6% 072.2% (increasing) 1998–99, 2001, 2004, 2008–current 2013
 Belgium 3.7% 098.0% (increasing) 2008–current 2012
 Bulgaria 2.1% 016.3% 2009–10 Comply
 Croatia  %  %
 Cyprus 6.3% 071.6% (increasing) 1998–99, 2001–04, 2009–current 2012
 Czech Republic 3.1% 041.2% 1998–2003, 2005, 2009–current 2013
 Denmark 1.8% 046.5% No breaches1 2013
 Estonia -1.0% (surplus) 006.0% 1999 Comply
 Finland 0.5% 048.6% No breaches1 Comply
 France 5.2% 085.8% (increasing) 2002–05, 2007–current 2013
 Germany 1.0% 081.2% (declining) 1998–99, 2002–05, 2008–10 Comply
 Greece 9.1% 165.3% (increasing) 1998–current 2014
 Hungary -4.3% (surplus) 080.6% (declining) 1998–99, 2001–10 2012
 Ireland 13.1% 108.2% (increasing) 2008–current 2015
 Italy 3.9% 120.1% (increasing) 2001–06, 2008–current 2012
 Latvia 3.5% 042.6% 1999, 2008–current 2012
 Lithuania 5.5% 038.5% 2000–01, 2008–current 2012
 Luxembourg 0.6% 018.2% No breaches Comply
 Malta 2.7% 072.0% (increasing) 1998–2004, 2008–current 2011
 Netherlands 4.7% 065.2% (increasing) 2003, 2009–current 2013
 Poland 5.1% 056.3% 1998, 2001–06, 2008–current 2012
 Portugal 4.2% 107.8% (increasing) 1998–current 2014
 Romania 5.2% 033.3% 1998–2001, 2008–current 2012
 Slovakia 4.3% 052.1% 1998–2002, 2006, 2009–current 2013
 Slovenia 6.4% 047.6% 2000–01, 2009–current 2013
 Spain 8.5% 068.5% (increasing) 2008–current 2014
 Sweden -0.3% (surplus) 038.4% No breaches Comply
 United Kingdom 8.3% 085.7% (increasing) 2003–05, 2008–current 2014 (FY)
European Union Eurozone 17 4.1% 088.0% (increasing) 2003–05, 2008–current N/A
 EU28 4.5% 083.0% (increasing) 2003–05, 2008–current N/A

1 For both Denmark and Finland an EDP was initiated on 13 July 2010, based upon that the forecasted 2010 figures were thought to breach the SGP. The forecasts however, was later proved to have been too negative, as the actual fiscal accounts for both 2010 and 2011 did not constitute any SGP breach.

Medium-Term budgetary Objective (MTO)[edit]

In order to ensure long-term compliance with the SGP deficit and debt criteria, the member states have since the SGP-reform in March 2005 strived towards reaching their country-specific Medium-Term budgetary Objective (MTO). MTOs are the states' calculated upper target limit for its structural deficit relative to GDP and are considered to ensure sustainability of the government accounts throughout the following 20 years (considering both future potential GDP growth, future cost of government debt, and future increases in age-related costs). The structural deficit is calculated by the European Commission as the cyclical-adjusted deficit minus "one-off expenditures" (i.e. one-off payments due to reforming a pension scheme). The cyclical-adjusted deficit is calculated by adjusting the achieved general government deficit (in % of GDP) compared to each years relative economic growth position in the business cycle, which is found by comparing the achieved GDP growth with the potential GDP growth. So if a year is recorded with average GDP growth in the business cycle, then the "cyclical-adjusted deficit" will be equal to the "government budget deficit". In that way, because it is resistant to GDP growth changes, the structural deficit is considered to be neutral and comparable across an entire business cycle (including both recession years and "overheated years"), making it perfect to be used consistently as a medium-term budgetary objective.[23][24]

Whenever a country does not reach its MTO, it is required to implement yearly improvements comparable to minimum 0.5% of GDP, although it should be noted that several sub-rules exist altering this requirement. At the moment, it is the responsibility of each member state to define their current MTO, and inform the European Commission about it each year in the state's submitted Convergence/Stability report. The EU member states, having ratified the Fiscal Compact and being bound by its fiscal provisions, are obliged to select a MTO which does not exceed a structural deficit of 1.0% of GDP at maximum if they have a debt-to-GDP ratio significantly below 60%, and of 0.5% of GDP maximum if they have a debt-to-GDP ratio above 60%.[23][24] As of January 2015, the following six states are not bound by the fiscal provisions of the Fiscal Compact (note that for non-Eurozone states to be bound by the fiscal provisions, it is not enough just to ratify the Fiscal Compact, they also need to attach a declaration of intent to be bound by the fiscal provisions, before this is the case): UK, Czech Republic, Croatia, Poland, Sweden, Hungary.

The table below has listed all country-specific MTOs throughout 2005-2013, and colored each year red/green according to whether or not the MTO was achieved, according to the latest published calculation of the structural deficits, which can be found listed in the European Commission's AMECO database[25] or its latest Economic Forecast report.[26]

Country-specific MTO's
(structural balance, % of GDP)
2005[27] 2006 2007 2008 2009 2010 2011 2012[23] 2013
Austria 0.0% 2016-0.45% in 2016
Belgium -99.5+0.5% +0.5% 2032+0.5% in 2032[24] 2016+0.75% in 2016[28]
Bulgaria - -0.6% -0.5%[29] 2017-0.5% in 2017[29]
Croatia - - - - - - - -
Cyprus -0.5% 20140.0% in 2014
Czech Republic -1.0% -1.0% 2015-1.0% in 2015 202X-1.0% in 202X[30]
Denmark -97.5+1.5% to +2.5% -98.5+0.5% to +1.5% -98.5+0.5% to +1.5% -98.25+0.75% to +1.75% 0.0% 20150.0% in 2015 -0.5% -0.5% -0.5%[31]
Estonia 0.0% 20130.0% in 2013
Finland -98.5+1.5% 2016+0.5% in 2016 2014-0.5% in 2014[32]
France 0.0% 20160.0% in 2016
Germany 0.0% -0.5% -0.5% -0.5%[33]
Greece 0.0% ? ? in ????
Hungary -0.5% to -1.0% 2013-1.5% in 2013 -1.7%[34]
Ireland 0.0% ?-0.5% in ????[35] 20190.0% in 2019[36]
Italy 0.0% 20130.0% in 2013
Latvia -1.0% -1.0% 2015-0.5% in 2015 2019-0.5% in 2019[37]
Lithuania -1.0% +0.5% 2016+0.5% in 2016 2015-1.0% in 2015[38]
Luxembourg -0.8% +0.5% 2018+0.5% in 2018[24] -99.5+0.5%[39]
Malta 0.0% 0.0% 20210.0% in 2021[24] 20170.0% in 2017[40]
Netherlands -99-0.5% to +1.0% -0.5% 2018-0.5% in 2018[24] 2018-0.5% in 2018[41]
Poland -1.0% -1.0% 2015-1.0% in 2015
Portugal -0.5% 2015-0.5% in 2015[42]
Romania - 2016-0.7% in 2016 2014-1.0% in 2014[43]
Slovakia -0.9% 0.0% 2022-0.5% in 2022[24]
Slovenia -1.0% 0.0% 20150.0% in 2015 2017-0.5% in 2017[44]
Spain 0.0% 20160.0% in 2016
Sweden -98+2.0% +1.0% -1.0% -1.0%[45]
United Kingdom N/A N/A N/A N/A N/A 2014-150.0% in 2014-15[46] 2014-150.0% in 2014-15[47] 2016-170.0% in 2016-17[48] 2016-170.0% in 2016-17[49]
  MTO not reached, with note of the forecasted year for reaching it
  MTO reached

Note about UK: Paragraph 4 of Treaty Protocol No 15, exempts UK from the obligation in Article 126(1+9+11) of the Treaty on the Functioning of the European Union to avoid excessive general government deficits, for as long as the state opts not to adopt the euro. Paragraph 5 of the same protocol however still provides that the "UK shall endeavour to avoid an excessive government deficit". On one hand, this means that the Commission and Council still approach the UK with EDP recommendations whenever excessive deficits are found,[50] but on the other hand, they legally can not launch any sanctions against the UK if they do not comply with the recommendations. Due to its special exemption, the UK also did not incorporate the additional MTO adjustment rules introduced by the 2005 SGP reform and six-pack reform. Instead, the UK has defined their own budget concept and, since June 2010, have strived towards reaching a medium term target at "0.0% or surplus" for their Cyclically-Adjusted Current Budget (corresponding to the SGP structural deficit, except that it does not include the expenditure "Public sector net investment" and refrains from performing any adjustment for one-off revenues/expenditures), which was initially forecasted to be reached in 2014-15.[46] For comparison with the SGP's definition of structural deficits, it shall be noted that the UK has been forecasted to spend on average 1.3% of GDP annually on "Public sector net investment" throughout the seven years from 2011-12 to 2017-18. When this extra deficit figure is added to the CACB deficit, it will be equal to the "SGP structural deficit before adjustment for one-off revenues/expenditures".[49] As of 2013, the CACB target and definition has remained unchanged, but its achievement date has now been postponed to 2016-17.[49] Finally, the UK fiscal debt-ratio target also differs from the SGP debt-ratio target, as it measure compliance with the target according to "net debt" rather than "gross debt", and only requires that it should start posting a declining trend as from 2015-16 (with a future UK specific debt-to-GDP ratio target only to be published and decided at that point of time).[51]

See also[edit]



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  7. ^ "Who does what in EMU". European Commission. Retrieved 28 August 2012. 
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  9. ^ Milton Friedman and the Euro, Cato Institute, 2008
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  11. ^ "Row over 'stupid' EU budget rules". BBC News. 17 October 2002. Retrieved 26 April 2011. 
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  17. ^ "Council reaches agreement on measures to strengthen economic governance" (PDF). Retrieved 26 April 2011. 
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