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.
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.
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.
Two additional proposals, aimed at strengthening fiscal surveillance and budgetary coordination specifically within the euro area, referred to as the "two-pack", are currently reaching the end of the legislative process. The two-pack regulations will further enhance surveillance, coordination and enforcement of budgetary discipline.Operating alongside the EU framework at an intergovernmental and national level, the Fiscal Compact contained within the intergovernmental Treaty on Stability, Coordination and Governance (TSCG) complements, and in some areas enhances further, key provisions of the SGP and it also requires Member States to enshrine these provisions in national law. The TSCG was signed by 25 EU Member States (all but the United Kingdom and the Czech Republic) and entered into force on 1 January 2013.