Discipline and Flexibility - The Stability and Growth Pact

Abstract: In “The economics of the government budget constraint” Stanley Fischer discusses the negative implications of government deficits and debts and concludes that to achieve stability and growth a state should implement fiscal discipline i.e. keep the budget in balance. In “Fiscal policy rules” George Kopits and Steven Symansky discuss the difficulties for a state to exercise fiscal discipline due to the fact that it is politically challenging to implement the measures needed to balance the budget. Hence the authors argue for the benefits of fiscal policy rules; a set of budget rules for the governing powers to adhere to. According to the authors it is however not enough for the Member States to achieve a balanced budget through tax increases and expenditure cuts. For a fiscal policy rule to be optimal the rule has to provide for structural reforms and give the government the possibility to respond to exogenous chocks affecting the economy. Stanley Fischers reasoning on fiscal discipline and budget balance is manifested in an EU context through the framework of the Stability and Growth Pact (SGP). The SGP is designed to ensure that the Member States achieves a balanced budget and exercises fiscal discipline. However the SGP-framework has since long been debated, one of the most significant questions being whether it is really worth appeasing fiscal discipline at a cost of limiting fiscal flexibility. The aim of this study is to investigate how the governing bodies of the EU have used the SGP to promote stability and growth in the EU. To achieve this aim the author tries to answer the following research question: Have the governing bodies focused on fiscal discipline, fiscal flexibility or both when assessing whether a Member State is following the SGP? In an effort to answer the research question and reach the aim the author, by looking at the reasoning, and ultimately the decisions, of the Commission and the Council, will evaluate whether they have chosen to use on fiscal discipline, and thus enforced the debt and the deficit criteria by taking disciplinary action or whether they have allowed the Member States to deviate from the debt and the deficit criteria with regard to exogenous shocks to the economy and attempted structural reforms, thus using fiscal flexibility. In the thesis it is concluded that the Commission and the Council have allowed the Member States to deviate from the debt and deficit targets due to exogenous shocks and attempts at structural reforms. However, they have undertaken disciplinary action when the Member States has failed to meet the targets and the failure has not been due to the above mentioned factors.