EU fiscal sustainability and the reformed stability and growth pact

Abstract

The conduct of sound fiscal frameworks in the European Union (EU) was considered a priority since the early 1990s in the context of the economic and monetary union (EMU) and the single currency. Indeed, since the EMU lacks a framework of binding fiscal rules, there is a risk of a deficit bias in individual Member States which may lead to external imbalances. Furthermore, long-run challenges from age-related expenditures reflecting rapid population ageing in the EU further require Member States to maintain sustainable budget balances. These risks to fiscal sustainability necessitate collective fiscal discipline and coordination among the EU Member States. In this regard, the Maastricht Treaty contains provisions for the surveillance and coordination of Member States' fiscal policies and commits all Member States to avoid excessive public deficits and maintain government debt ratios below 60 per cent of GDP. The Stability and Growth Pact (SGP), which was adopted in 1997, underpins the functioning of the fiscal Maastricht criteria. Through the Pact's preventive and dissuasive elements, particularly following its reform in 2005, the SGP provides a balance between fiscal discipline necessary to ensure fiscal sustainability and macroeconomic stabilisation.