The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the European Union. It was established to safeguard sound public finances, based on the principle that economic policies are a matter of shared concern for all Member States. The Macroeconomic Imbalances Procedure (MIP) operates alongside the SGP to identify and correct macroeconomic imbalances and monitor competitiveness developments.
The SGP contains two arms – the preventive arm and the corrective arm. The preventive arm seeks to ensure that fiscal policy is conducted in a sustainable manner over the cycle. The corrective arm sets out the framework for countries to take corrective action in the case of an excessive deficit.
The cornerstone of the preventive arm is the country-specific medium-term budgetary objective (MTO), defined in structural terms (i.e. in cyclically adjusted terms and net of one-off and other temporary measures). Member States outline their medium-term budgetary plans in stability and convergence programmes (SCP), which are submitted and assessed annually in the context of multilateral fiscal surveillance under the European Semester.
The corrective arm is made operational by the Excessive Deficit Procedure (EDP), a step-by-step procedure for correcting excessive deficits that occur when one or both of the rules that the deficit must not exceed 3% of GDP and public debt must not exceed 60% of GDP (or at least diminish sufficiently towards the 60%) defined in the Treaty on the Functioning of the EU (TFEU or Treaty) are breached.
Non-compliance with either the preventive or corrective arms of the Pact can lead to the imposition of sanctions for euro area countries. In the case of the corrective arm, this can involve annual fines for euro area Member States and, for all countries, possible suspension of Cohesion Fund financing until the excessive deficit is corrected.
Treaty on the Functioning of the European Union (TFEU)
Articles 121 and 126 of the TFEU provide the legal basis of the Stability and Growth Pact. While Art. 121 outlines the preventive arm of the SGP, Art. 126 of the Treaty forms the basis for the corrective arm and the EDP and Protocol 12 defines the reference values of 3% of GDP for public deficit and 60% of GDP for public debt.
The Six Pack
Secondary legislation governing the Stability and Growth Pact was initially approved in 1997, with significant reforms enacted in 2005 and 2011. The 2011 reforms, referred to as the "six-pack", addressed gaps and weaknesses in the framework identified during the recent economic financial crisis. These reforms significantly strengthened both the fiscal surveillance and enforcement provisions of the SGP by adding an expenditure benchmark to review countries' fiscal positions, operationalising the Treaty's debt criterion, introducing an early and gradual system of financial sanctions for euro area Member States, and requiring new minimum standards for national budgetary frameworks.
The 2011 reforms also brought the surveillance of both budgetary and economic policies together under the European Semester, to ensure the consistency of the policy advice given. Further details on the implementation of the SGP by Member States are given in a code of conduct, which was last revised in September 2012.
The Two Pack
Recognizing the extent and potential consequences of spillovers among euro area Member States' economic and budgetary situations, the Two Pack Regulations, which entered into force on May 30, 2013, build on the Six Pack reforms by introducing additional surveillance and monitoring procedures for euro area Member States.
The Two Pack Regulations support adherence to the SGP's existing fiscal surveillance framework, while at the same time establishing a comprehensive surveillance regime for those Member States in the euro area threatened with or experiencing serious difficulties with respect to their financial stability.
This legislation introduces a European assessment of draft budgetary plans on a coordinated timeframe in Autumn for euro area Member States and improves national budgetary frameworks by requiring them to set up independent bodies in charge of monitoring national fiscal rules and to base budgetary forecasts on independent macroeconomic forecasts.
For euro area Member States in EDP, a system of graduated monitoring is established in order to secure a timely and durable correction of excessive deficits and to allow an early detection of risks that a Member State does not correct its excessive deficit by the deadline set by the Council. Requirements placed on financially fragile countries are streamlined for countries currently receiving financial assistance while enhancing monitoring that will also enable the Commission to better assess the risks threatening or faced by the Member State in question and thus, in some cases, address vulnerabilities even before a need for financial assistance arises.
To support the effective implementation of the Two Pack legislation, Member States and the Commission have agreed on harmonised frameworks for the draft budgetary plans and for the debt issuance reports, as adopted by the Commission in Communication COM(2013) 490 and contained in a Code of Conduct which sets out all commonly agreed guidelines.
In addition, the form and content of the new regular reporting by Member States in EDP have been set out in a delegated Regulation, adopted by the Commission on 27 June 2013. This delegated act will enter into force if the co-legislators do not object to it by 27 August 2013.
The Fiscal Compact
Finally, the Fiscal Compact contained within the inter-governmental Treaty on Stability, Coordination and Governance (TSCG) complements, and in some areas enhances further, key provisions of the SGP. Specifically, the Fiscal Compact requires Member States to enshrine in national law a balanced budget rule with a lower limit of a structural deficit of 0.5% GDP, centered on the concept of the country-specific medium-term objective (MTO) as defined in the SGP. The Fiscal Compact’s provisions also increase the role of independent bodies, which are given the task of monitoring compliance with the national fiscal rules, including the operation of the national correction mechanism in case of deviation from the MTO or the adjustment path towards it (also included in the Two Pack). The TSCG, signed by 25 EU Member States (all but UK and Czech Republic), entered into force on January 1, 2013 and is binding for all euro area Member States that have ratified it, while other contracting parties will be bound only once they adopt the euro or earlier if they signal it.