Abstract
The European Council created the Stability and Growth Pact (SGP), an agreement among the 16 members of the European Union who take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union. The pact was adopted in its Amsterdam session on 17 June 1997 in order to guide the member states towards common policy goals. The pact binds all member states to engage in the prompt implementation of the excessive deficit procedure (EDP). The Council had clarified two important aspects that member states must follow. The first requirement states that the member states must have a budget deficit below three percent of the nation's gross domestic product (GDP); meanwhile, the second requirement targets debts, forcing member states to reduce their government debts below sixty percent of GDP.
The objective of the pact is to make the member states stay under the three percent budgetary deficit even in unfavorable periods unless "exceptional" circumstances emerge. Even if the circumstances are qualified as exceptional, the member states could only temporarily have a budget deficit in excess of the three per cent limit. For example, the member states would consider an economic downturn as an "exceptional event" only if "there is an annual fall in GDP of at least 2 percent." Furthermore, the SGP required countries to return below the three percent threshold within a year after the deficit rose above it, based on the SGP's definition of the word "temporarily." As constituted, this would have created difficulties during the international recession which started in December 2007, according to the United States National Bureau of Economic Research.
In 2005, however, the European Union (EU) heads of states met at a summit and revised the SGP. This leads to the question, Does the revised version of the Stability and Growth Pact better allow the member states to survive the international crisis economically? This analysis will try to answer this question in two different ways. After providing the necessary background to the SGP, it will explain if the original SGP could have successfully brought member states through the international crisis. Secondly, it will analyze if the changes to the SGP have better prepared the member states to react to the crisis.
