Tuesday, March 26, 2013

EU Stability and Growth Pact – Theory vs. Practice!



Habt euch vorher wohl präparirt, Paragraphos wohl einstudirt, damit ihr nachher besser seht, daß er nichts sagt, als was im Buche steht.”
After studying the law, you will realize that it only says what is written.”
(Johann Wolfgang von Goethe, Faust)

When it comes to legal affairs, theory and practice don’t always match. The EU stability and growth pact is a good example here.

The subject-matter of the pact is to monitor budgetary positions, to avoid excessive government deficits, and to coordinate economic policies. The final goal is to

  • safeguard price stability;
  • develop strong growth;
  • create employment;
  • guarantee a sustainable exchange rate stability.


Reference values and medium terms objectives

At the heart of the regulation are the following reference values that the EU member states commit to respect

  • Government deficit of maximum 3 % of GDP
  • Government debt to GDP ratio of maximum 60 %


To reach the above objectives, the EU member states adhere to reach tailor-made medium term objectives of budgetary positions situated between – 1 % of GDP and a balanced or surplus budget.

Each EU member state engages to build and publish programs showing how they intend to reach the above objectives. Such program is called “stability program” in case of an EU member state of the Eurozone and “convergence program” for any other EU member state.


Stability program

Contents of a stability program:

  • Expected path of the government budget, debt ratio, expenditure, revenue, and capital formation
  • Main assumptions about expected economic developments and variables
  • Scenario analysis for those assumptions
  • Quantitative assessment of budgetary and other economic policy measures
  • Reasons for a deviation from the required adjustment path towards the medium term budgetary objectives


Stability programs shall be submitted and published annually by April 30 at the latest.

Deviations from the medium term objectives are possible

  • to implement long-term structural reforms;
  • to carry out pension reforms;
  • in case of an unusual event outside the control of the member state concerned and which has a major impact on the financial situation of the government;
  • in case of a severe economic downturn (The reference point for such downturn is an annual fall of at least 0.75 % of real GDP.) in the Eurozone or EU.

However, these exceptions can only be granted temporarily.


Convergence program

Contents and publication details of convergence programs as well as exceptions from medium term objectives are almost identical with the regime of stability programs. It’s just the packaging that changes.


The regulation distinguishes between EU member states which have adopted the Euro and those which have chosen to keep their domestic currencies.

The above material rules are secured by very detailed procedural rules including submissions by the member states and reports and sanctions by the European Commission.


The Stability and Growth Pact in Practice

Government Deficit






In the above data set, you can see that

  • ,between 2002 and 2011, the number of EU countries which don’t meet the 3 % reference value has increased from 14 to 18.
  • Greece and Portugal have never met the government deficit floor since 2002. Italy and Hungary have only succeeded once, in 2007 and 2011 respectively.
  • ,on average, the highest budgetary deficits can be found in Greece (8.08 %) and Ireland (5.95 %).
  • only northern European countries has average surplus budget levels: Denmark (1.4 %), Estonia (0.65 %), Luxembourg (0.79 %), Finland (2.05 %), Sweden (0.86 %), and Norway (13.3 %).


Government Debt





I extract five main conclusions from the above government debt data:


  • In 2002, six countries had reached a debt level beyond 60 % of GDP. By 2011, this number has more than doubled (15 countries).
  • Between 2002 and 2011, five countries have never met the 60 % government debt cap: Belgium, Austria, Germany, Greece, and Italy.
  • The countries with the highest average debt levels are Greece (117 %), Italy (109 %), Belgium (94 %), and Portugal (74 %).
  • Italy’s debt level is among the highest in Europe and, even more interestingly, shows very low variation.
  • In northern Europe (Estonia, Latvia, Lithuania, Finland, Sweden, and Norway), debt levels are, by far, lower than in the southern part.


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