The Stability and Growth Pact and the New “Flexibility” Rules

Abstract

The euro currency imposes three conditions: price stability, fiscal sustainability, and exchange rate stability. The Stability and Growth Pact (SGP) has created two budgetary limits: 3% of GDP for deficit and 60% for public debt. If a country violates these limits, sanctions can be applied. However, there are two exceptions: economic recession or temporary excessive deficit resulting from extraordinary events. After the 2005 reform (and reinforced by the Fiscal Treaty), the Medium-Term Objective (MTO) was created (usually for a structural deficit of 0.5% of GDP). Recently, there has also been a “relaxation” of the SGP’s rules and targets for contributions to the “Juncker Investment Plan”, and in those countries with a budget deficit below 3%, there has also been a change concerning how the SGP deficit limit of 3% is accounted for, as well as the funding of cofinanced projects, structural reforms, and the cyclic component.