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Frequently Asked Questions

What is the Stability and Growth Pact?

The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the European Union. It contains two arms:

  • The preventive arm seeks to ensure that fiscal policy is conducted in a sustainable manner over the cycle, preventing recourse to the corrective arm.
  • The corrective arm – also known as the Excessive Deficits Procedure (EDP) – sets out the framework for countries to take corrective action in the case their government deficit is above 3% of GDP or when their debt is over 60% of GDP and not falling quickly enough towards the Treaty reference value.

Why is a fiscal framework needed in the EU?

The need for fiscal rules stems from the greater interdependencies and spillovers in terms of the impact of economic and budgetary policies that result from monetary union. By imposing a common framework within which Member States would set budgetary policy, the possibility of negative impacts on other euro area countries – whether stemming from the inflationary impact of large deficits or the destabilising effect of unsustainability or insolvency – could be reduced and monetary policy could operate in a stable environment.

The SGP was introduced in 1997 in anticipation of the launch of the euro and is inextricably tied to it. It applies to all EU countries, although it contains certain enforcement provisions that apply only to the euro area. It was introduced as the continuation of the convergence criteria applicable to countries on joining the single currency.

Monetary policy

The countries participating in the euro are connected via a common currency and monetary policy, implemented by the European Central Bank. The fact that monetary policy is common to all participants is necessary for the common currency to operate.

Budgetary policy

For budgetary policy, a wider range of choices is possible – from a centralised EU budgetary policy to national government retaining complete discretion over their fiscal choices. The decision made was for budgetary policy to be decided at the national level, albeit within some overall rules set at the EU level. In practice, the framework chosen is one of overall principles and detailed implementation instructions, which allow for countries' individual circumstances to be taken into account.

Who decided on the current framework?

In short – the countries of the EU.

The SGP Pact is a set of EU legal acts, which means that it was adopted according to the processes defined under EU law. It is based on Treaty provisions which were agreed on unanimously by all the countries of the EU in 1992, in Maastricht.

  • The first version, which was adopted in 1997, consisted of two Regulations which were proposed by the Commission, following a declaration by Heads of State or Government. The texts were then discussed by the representatives of all Member States, and adopted according to qualified majority voting.
  • A first revision of the SGP occurred in 2005. The Commission proposed amendments to the two Regulations, which were negotiated and adopted by Member States.
  • The second reform of the SGP – an overhaul of the existing framework, in response to the crisis, known as the Six Pack – took place in 2011 in the renewed institutional setting of the EU, as reframed by the Lisbon Treaty in 2009. This gave the European Parliament a more active role by expanding the areas in which EU legislation is approved by the European Parliament and Council under the ordinary legislative procedure. Accordingly, four of the six Commission proposals were discussed and adopted through this procedure, while the other two texts were considered as part of the overall economic governance package and approved by the Council. While the new voting rules require approval by qualified majority by the Member States, only euro area Member States vote in the Council on dossiers specifically pertaining to the euro or euro area—in the case of the Six Pack, for example, the regulation introducing financial sanctions for the euro area.
  • The latest addition to the SGP – the Two Pack – has also gone through the ordinary legislative procedure, but only voted on by euro area countries. Both the Six Pack and Two Pack legislative process included extensive discussions among the Commission, European Parliament and Council.

Who implements the framework?

The Member States, the Council of the European Union and the European Commission play the main roles in implementing the SGP, in accordance to the legislation. Broadly, their roles are as follows:

The Member States

  • Are responsible for the setting of national budgetary policies, including decisions about the composition and levels of taxes and spending.
  • Take the necessary measures to be compliant with the European rules.
  • Communicate their fiscal outcomes to the European Commission’s statistical body Eurostat, submit annual Stability and Convergence Programmes (SCPs) with their medium-term budgetary plans to the Commission and the Council for assessment and from October 2013, for euro area Member States, their draft budgetary plans.
  • If under EDP, they present reports to the Commission and the Council setting out their response to the recommendations that have been addressed to them.

The European Commission

  • Monitors Member States' compliance with the SGP's provisions, analysing the reports and programmes the Member States submit.
  • Prepares regular reports and analyses of Member States’ economic and fiscal situation and outlook.
  • Prepares opinions and recommendations for Council legislative acts, which form the basis of the legal guidelines issued to Member States.

The Council of Ministers – where Member States are represented by their Minister of economics or finance

  • Takes policy decisions on the application of the SGP including the imposition of sanctions. These take the legal form of Council recommendations, opinions or decisions.
  • The Council always acts on the basis of Commission’s recommendation or proposal. In the case of sanctions, the Council votes to reject the Commission's position, while in other votes it votes to accept it. The decisions and recommendations issued by the Council are binding.

What are the main characteristics and objectives of the rules?

The SGP was set up to achieve sustainable public finances which is a pre-requisite for a stable economic environment that allows monetary policy to operate effectively.

Medium-term budgetary objective

The cornerstone of the preventive arm is the operationalization of a balanced budget rule through a so-called medium-term budgetary objective (MTO) that countries must attain or make sufficient progress towards. The MTO is a country-specific reference value for individual Member States and is defined in structural terms so that the impact of the economic cycle and of one-off and temporary measures is removed.

  • Every spring, countries submit Stability or Convergence Programmes, which detail budgetary objectives and planned budgetary measures, as part of the European Semester.
  • During the European Semester, the Commission and the Council look at whether the provisions of the preventive arm have been and are planned to be adhered to according to the Member States' plans. In doing so, the MTO plays a key role and the change in expenditure, net of any discretionary revenue measures, is also looked at.

Excessive Deficit Procedure

The corrective arm implements what is known as the excessive deficits procedure (EDP). The EDP follows a step-by-step procedure which begins with a Member State having breached the limits on government deficits and debt given in the Treaty. These correspond to a 3% of GDP limit on government deficits and 60% of GDP limit of government debt, unless the debt is diminishing towards that value at an appropriate pace.

  • If countries are found to have breached these requirements an Excessive Deficit Procedure (EDP) is launched.
  • Once under EDP, the Member State in question is issued with recommendations and budgetary targets that lead to its deficit and debt being brought back into line with the numerical thresholds within a specific deadline.
  • Following the issuance of the recommendations, the country's budgetary decisions are closely followed.
  • If the Member State takes action in line with what is asked, there are no further consequences and the EDP is abrogated once the final targets are attained.
  • Otherwise, countries can have alternative recommendations and budgetary targets issued if it is found that they are taking the necessary action but economic circumstances are not conducive to the actual targets being met or, in the case of euro area countries, the EDP can be stepped up. Each stepping-up should entail the imposition of sanctions, for euro area countries.

Has the crisis changed the rules?

The economic and financial crisis that erupted in 2008 highlighted the underlying weaknesses in many EU countries' budget positions.

  • The weak budgetary position and high debt of a number of Member States meant that their governments were not able to provide stimulus to their economies when the crisis erupted.
  • The years prior to crisis – years of sustained growth – had not universally been used to put the public finances in good order but had instead in many cases resulted in increasing expenditure trends.
  • Underlying macroeconomic imbalances aggravated the impact of the crisis in a number of countries and the high level debt meant that some reaching the end of the possibility of funding their deficits on the open markets.

In all these ways, the crisis brought to light the gaps within the Stability and Growth Pact (SGP) that had not been addressed during 2005 reforms and which needed to be acted on in order to put the EU public finances on a stronger footing in the future. The crisis thus served as an eye opener to the shortcomings in European budgetary surveillance, prompting a significant reform of the SGP in 2011. In addition, in March 2013, two pieces of complementary legislation known as the Two Pack were adopted. These are specific to the euro area and are also borne out of the lessons learnt in recent years.

The 2011 reform of the Pact was part of a package of six legislative acts known collectively as the Six Pack.

  • The Six Pack strengthened both the preventive and corrective arms of the Pact.
  • The operational guidance given to countries under the preventive arm was enhanced to guide countries more resolutely to sustainability during good economic times, so that they were better able to face more difficult conditions.
  • The possibility of sanctions was introduced into the preventive arm for the first time – for euro area countries.
  • For the corrective arm, the Six Pack operationalized the debt criterion, reflecting the crucial need to focus on debt as a key determinant of whether public finances are conducive to economic stability.
  • An early and gradual system of financial sanctions for euro area Member States was added to the pre-existing provisions.
  • A macroeconomic imbalances procedure – including a corrective arm – was also introduced as part of the Six Pack to introduce an economic arm to European surveillance.

The crisis has also highlighted the very strong links between the economies and budgetary situations of the members of the euro area, making a case for stronger coordination of fiscal decisions for among participating countries.

The most recent Two Pack reforms do exactly this by strengthening the surveillance mechanisms in the euro area.

  • The two proposals will improve the delivery of budgetary policy in the single currency area, by increasing the coordination among euro area countries and increases the transparency of Member States' budgetary decision-making.
  • The Two Pack reforms strengthen monitoring and surveillance procedures for euro area Member States, but they do not make quantitative changes to the SGP's budgetary rules.
  • Rather, they build on the Six Pack reforms by introducing enhanced coordination for euro area Member States to support adherence to the SGP's existing fiscal surveillance framework.

Will the changes to the SGP solve the crisis?

The aim of the changes to the SGP is to improve the public finances over the longer term.

The reforms have led to an SGP that is better equipped to deliver healthy public finances to ensure that the EU economies are better able to face the future. Debt sustainability has become central to the excessive deficit procedure and the mechanisms for ensuring that the public finances are improved in good times have been strengthened. Taken together, the changes in the Six Pack will ensure that Member States' budgetary and macro-economic positions are sound and provide fiscal space during difficult economic times.

Alongside the Six Pack, measures have been taken to address the immediate impact of the crisis, including the provision of financing to countries in need via European Stability Mechanism (and its predecessors), the reform of the banking and financial sector and the growth strategy under Europe2020.

The Six Pack has had an immediate impact through the strengthening of the credibility of the EU budgetary framework. The reinforcement of the fiscal surveillance framework has been a strong statement that allows the public in general and investors in particular to be reassured that fiscal risk is under control in EU Member States independently from short-term economic developments. The immediate impact of the implication of the reduction in fiscal risks is a reduction in interest rates, which at the same time reduces cost for public finances and allows an easier consolidation.

Does the framework take the needs of countries in recession into account?

The budgetary surveillance framework takes the economic situation of the Member States into account in both the preventive and the corrective arms. In the preventive arm, not only is its cornerstone – the MTO – set in structurally adjusted terms so that the impact of the economic cycle is netted out, but the requirements for countries to attain this MTO are modulated according to whether they are in "good" or "bad" economic times.

The corrective arm considers the economic position of Member States. Although countries under EDP are given budgetary targets that they should achieve, they may be issued with revised recommendations which can include longer deadlines if weak economic outcomes impede their ability to meet their targets despite the measures they have taken. During the crisis, a number of countries had their EDP deadlines extended and the intensity of the effort required softened. And the setting of the recommendations itself can take the particular circumstances of countries into account, so that countries in recession can have shallower consolidation paths if they do not face immediate sustainability risks.

Is the SGP credible and enforceable when dealing with countries that are not compliant?

One of the key elements of the 2011 reforms to the SGP was to have significantly strengthened the implementation and enforcement of the rules. They introduced sanctions to the preventive arm and added an early and gradual system of financial sanctions in the corrective arm – in both cases only for euro area Member States.

Preventive arm

  • Countries can be asked to lodge an interest-bearing deposit, if they repeatedly fail to comply with the requirements to move towards their MTO.
  • This strengthening of the preventive arm is central to delivering strong public finances, as it applies to countries even when they are within the 3% deficit-to-GDP and 60% debt-to-GDP Treaty reference limits.
  • Experience has shown that it is when economic times look good, that the strengthening of the public finances should be prioritised so that countries can face shocks safe in the knowledge that they are both able to withstand them better and that they can deliver support to their affected economies.

Corrective arm

  • The new system of sanctions now applies earlier and can be activated gradually at each stage of the EDP procedure.
  • A key innovation in the new sanctions procedures was the introduction of reverse qualified majority voting (RQMV) for most sanctions decisions. RQMV implies that a recommendation or proposal of the Commission is considered adopted in the Council unless a qualified majority of Member States votes against it. It is now used to impose all sanctions with the exception of annual imposition of a fine following the decision on a lack of effective action under the stepping up of EDP, which is decided using normal qualified majority voting. It means that the imposition of sanctions will now be semi-automatic, increasing the enforceability of the EDP.

Treaty on Stability, Coordination and Governance

The credibility of the rules has also been strengthened by the intergovernmental Treaty on Stability, Coordination and Governance (TSCG), signed by all euro area countries and eight non-euro area ones in March 2012, which contains the Fiscal Compact.

  • Under the Fiscal Compact, countries have committed to introducing the concept of the MTO into their national law and to introduce a correction mechanism which will be automatically triggered if their budgetary policy deviates from it.
  • The TSCG also builds on the directive on national budgetary framework, part of the Six Pack reforms. The Directive identified minimum requirements for national budgetary frameworks which are necessary to ensure that national procedures are able to deliver public finances in line with the European requirements.
  • The Fiscal Compact goes further by expanding the role of independent bodies (commonly called "fiscal councils") which are given the task of monitoring compliance with the national fiscal rules including the MTO and the correction mechanism associated to them.

Two-Pack

For the euro area Member States, the role and establishment of independent bodies at the national level is incorporated into community law through the Two Pack. This means that compliance with the preventive arm will no longer have to result from national budgetary decisions, but will be embedded into the very decision-making process in the member States.

Is this not very complicated?

It is true that the SGP and the related legislation consist of a large collection of detailed rules and procedures, which have gained in complexity with the 2005, 2011 and 2013 reforms. The increase in complexity is the price to be paid for the increase in flexibility that resulted from these reforms.

Relative to 1997, the Pact now takes a series of factors such as the economic cycle and the introduction of growth-enhancing reforms into account, and introducing these provisions into the framework has of course meant additional rules. While human judgment plays an important role in the implementation of the SGP, there has been an explicit decision to use a rules-based framework to ensure fairness and transparency both across time and across countries.

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