ENFORCEMENT AND THE STABILITY AND GROWTH PACT

The Maastricht Treaty imposes a debt limit of 60 per cent of GDP and a deficit ceiling of 3 per cent of GDP for countries participating in stage Ill of EMU The Stability and Growth Pact goes further and specifies the circumstances under which a deficit can be regarded as excessive, speeds up the procedure and defines the sanctions in the event of excessive deficits. Since the ratification of the Maastricht Treaty in 1993 and its extension through the Stability and Growth Pact (SGP) it has become a concern that EU countries will have lengthened recessions because they will not be able to run sufficiently large deficits to spur growth. In the paper, we use a Vector Autoregression on deficit and GDP for EU countries before and after 1993 to see if this concern is a valid one.