STABILITY AND GROWTH PACT

Stability and Growth Pact

Stability and Growth Pact

Introduction

The SGP (Stability and Growth Pact) was adopted at the Amsterdam European Council in June 1997 among the 17 members of European Union. It extends the effort to reduce public deficits committed to joining the Economic and Monetary Union (EMU). However, unlike monetary policy, fiscal policy remains a national competence.

The Stability and Growth Pact is an agreement in which countries in the euro area have to coordinate their national fiscal policies and avoid the appearance of excessive budget deficits. It requires states to have the euro area term budgets close to balance or in surplus. (PSC) is the instrument whose area countries Euro Currency unique in several Member States of the European Union form the euro area have established to coordinate national fiscal policies and avoid the appearance of excessive budget deficits. It requires states to have the euro area term budgets close to balance or in surplus. A central objective of the Stability and Growth Pact is to secure the post-sustainability of public finances in the member countries of European Union.

Discussion

The Stability and Growth was based essentially on two justifications:

The first was to prevent insolvent situation in a member state that could destabilize the whole euro financial system, since the Europe Central Bank could then be forced to create currency could thwart its goal of stability and where the anticipation of such a risk by the markets could lead to a rise in interest rates in the long term.

The second was the existence of short-term externalities in monetary union related to the exercise of fiscal policy which impact a negative externality when an actor has an unfavourable economic impact, incurring a cost to one or more other players direct without there being a direct means for players to get compensation for the damage. In this case, it was to avoid a Member State prone to "soft" budget that the sanction penalty by increasing interest rates is no longer centred on it but refer to all states in the euro area, including on the states maintaining a virtuous fiscal policy.

The Stability and Growth Pact requires the coordination of fiscal policies of member countries through compliance of the 3 per cent deficit ceiling and through the process of multilateral economic stability. It further waived down high composition of the Government expenditures or revenue, about the quality of existing debt, via the primary deficit, over the debt service or the high implicit debt. The requirement of the State Finance capacities is in itself not a necessary European setting to derived standards.

At its meeting on 17 June 1997 in Amsterdam approved the Heads of State and Government of the European Union, the European Council Resolution on the Stability and Growth was supplemented resolution on July 1997 by Council Regulation No. 1466/97 on the strengthening of budgetary surveillance and coordination of European fiscal policy and by Regulation No 1467/97 on speeding up and clarifying the excessive deficit ...