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What is the Stability and Growth Pact?

The Stability and Growth Pact is linked to EMU and is aimed at ensuring that Member States try to maintain budgetary discipline so that stability and growth can be strengthened in the EU.

According to the Stability and Growth Pact, Member States are obliged to maintain budgetary discipline in relation to public finances, which means that at normal levels of economic activity the Member States’ government budgets shall be in surplus or close to balance.

Each year, as part of the system for monitoring compliance with the Stability and Growth Pact, the Member States must provide the Commission and the Council with key economic data. The economic data the euro countries must provide is presented as stability programmes, while the countries outside the euro must produce convergence programmes.

These include, among other things, information on the Member States’ targets for the government budget for several years into the future, the forecast economic development, and details of the economic policy the Member State will implement to meet the targets of the Stability and Growth Pact.

On the basis of the economic data, the Commission assesses whether a country is going to have an excessive deficit. If the Commission considers that there is an excessive deficit or that one could arise, the Commission notifies the Council accordingly.

Council recommendations
It is then up to the Council to decide whether an excessive deficit exists. If the Council decides that an excessive deficit exists, the Council will make recommendations to the country to bring the situation to an end within a given period.

Enforcement notification by the Council
If the country does not follow the Council’s recommendations, the Council, acting by qualified majority, may adopt an enforcement notification in relation to that country requiring it to take the necessary economic measures to put its budget in order. If the notification is not complied with, the Council has the option of several possible sanctions, including deciding that the country must deposit an amount without interest with the European Central Bank. The amount will become a fine if the budget deficit is still excessive after two years.

However, in relation to the Stability and Growth Pact the sanctions only apply to countries which are participating in the euro, and it is only euro countries that take part in voting on this in the Council.

Stability and Growth Pact in crisis?

In 2004 there was a great deal of controversy surrounding the Stability and Growth Pact. The question is whether the monitoring procedure described here works in practice when the countries gathered in the Council are to make politically sensitive decisions to impose economic injunctions and possibly sanctions on another Member State.

In brief, the background is that in November 2003 the Commission recommended to the Council that it should decide that France had not followed the Council’s recommendation, that Germany’s economic measures had been insufficient to remedy the country’s poor economic situation and that the two countries should be ordered to take specific measures to remedy their deficits.
The Council makes decisions by qualified majority, and there was not a qualified majority in the Council to make the decisions proposed by the Commission. Instead, the Council adopted conclusions which in some ways reflected the Commission’s recommendations but in other ways suspended the procedure.

The Commission complained in a statement that the spirit and letter of the Treaty and the Stability and Growth Pact had not been followed by the Council and then brought an action against the Council in the European Court of Justice, which delivered its judgment in 2004.

The European Court of Justice did not agree with the Commission that the Council should have adopted the Commission’s recommendations at the Council meeting in November, but indicated that the Council might have an obligation at some time or other in the procedure to adopt a recommendation to a Member State which is persistently in breach of the Stability and Growth Pact. This issue could if necessary be decided by an action for failure to act. On the other hand, the Court of Justice did conclude that the Council acted contrary to EU law by suspending the procedure in connection with excessive deficits and when it tried to amend previously adopted recommendations.

In June 2004 the European Council asked the Commission to submit a proposal which could strengthen and clarify the implementation of the Stability and Growth Pact. In September 2004 the Commission presented a communication on possible measures to amend the Stability and Growth Pact.

The European Council on 22-23 March 2005 adopted a reform of the Stability and Growth Pact. The reform is based on the Commission Communication from september 2004 and was negotiated by the Council at an extraordinary Council meeting on 20 March 2005.

The British rebate
The guiding principle of the budget financing is that the Member States all contribute together to the EU budget without regard to whether overall, by virtue of transfers from the EU, the countries are net contributors or net beneficiaries. However, this is a principle with modifications. In 1984 the British Prime Minister, Margaret Thatcher, won a special rebate for the United Kingdom in connection with the financing of the EU’s budget. The British were unhappy about paying substantially larger amounts into the EU’s budget than they received in return in the form of agricultural subsidies, etc. Under the rebate the United Kingdom is repaid a certain percentage of the country’s net contribution. The rebate was later extended so the large net contributors, Germany, the Netherlands, Austria and Sweden, receive rebates on the financing of the British rebate. In 2004 the Commission presented a proposal for the reform of the financing system in which it is proposed that the British rebate be replaced by a general rebate system.

Sidst opdateret: 24-07-2008  - ANSJ