Glossary:Stability and growth pact (SGP)

The Stability and growth pact, abbreviated as SGP, is a rule-based framework for the coordination of national fiscal policies under economic and monetary union (EMU) and the creation of the euro area with its single currency, the euro. It was established to safeguard sound public finances, an important requirement for EMU to function properly. The SGP consists of a preventive and a dissuasive arm.

The SGP has to be seen against the background of Stage III of economic and monetary union, which began on 1 January 1999. Its aim is to ensure that the Member States continue their budgetary discipline efforts once the euro has been introduced.

The pact stems from a European Council resolution (adopted at Amsterdam on 17 June 1997) and two Council regulations of 7 July 1997 laying down detailed technical arrangements, one on the surveillance of budgetary positions and coordination of economic policies and the other on implementing the Excessive deficit procedure.

In the medium term, the euro-area Member States undertake to achieve a balanced or nearly balanced budget and to give the Council and the European Commission a stability programme every year. Along the same lines, Member States outside the euro area are required to submit a convergence programme.

The Stability and growth pact opens the way for the Council to penalise any euro area Member State that fails to take appropriate measures to end an excessive deficit. Initially, the penalty takes the form of a non-interest bearing deposit with the EU, but it could be converted into a fine if the excessive deficit is not corrected within two years.

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