The end of the Stability and Growth Pact?

Fiscal policy is the incomplete chapter in the macroeconomic arrangements agreed at Maastricht. The Stability and Growth Pact (SGP) was an attempt to patch it up, but it failed. We need to understand: why? When the Ecofin Council in November 2003 voted against proceeding with the Excessive Deficit Procedure regarding Germany and France, many observers concluded that the Pact was dead or at least “suspended”. No doubt the decision violated the spirit of the SGP. Yet, it was nothing else but the application of the rules: contrary to the original idea of automaticity of sanctions proposed by the German finance minister Theo Waigel in 1995, the Pact stipulated the need for a vote by the Council and therefore implied the possibility that the Commission might be overruled. The Commission requested Germany to reduce its structural deficit by 0.8% of the GDP, and France by 0.4%. This recommendation was blocked and thereby also the consequence of imposing sanctions if these countries would not comply. What appeared so shocking about the events in 2003 was the fact that the decision to not follow the Excessive Deficit Procedure was taken so early in the Pact’s life and as a consequence of bullying by the two largest member states and without genuine economic reasons. In other words, the procedures of the Pact have never been fully applied. Together with the serious policy divergences over the Iraq war and the failure of agreeing a European constitution, the SGP is the third major issue in less than one year that undermines the political credibility of European integration. I believe that this fact is not just to be blamed on incompetent or unwilling politicians; rather it is intrinsic to the issue of fiscal policy coordination in an incomplete federation. It is a constitutional issue.