Academic journal article National Institute Economic Review

The Pact Is Dead: Long Live the Pact

Academic journal article National Institute Economic Review

The Pact Is Dead: Long Live the Pact

Article excerpt

The ECOFIN Council decision of November 2003 that noted the existence of 'excessive deficits in France and Germany but did not impose sanctions on these two governments was widely interpreted as sounding the death-knell for the Stability and Growth Pact. A ruling by the European Court of Justice on 13 July 2004 annulled this decision, paving the way for reform of fiscal policy coordination in the Euro Area. This article examines what caused the difficulties that have arisen, reviews and appraises a range of proposals for reform of EMU's fiscal policy rules and suggests a way forward.

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At its meeting on 25 November 2003, the Economic and Financial Affairs Council of the EU (Ecofin) decided to accept the advice from the European Commission that France and Germany were in breach of their Treaty obligations to avoid excessive budgetary deficits. But the Council also decided not to impose any sanctions on the two largest members of the Euro Area. This outcome was widely interpreted as sounding the death-knell for the unloved Stability and Growth Pact (SGP) and also challenges recommendations to Member States under the Broad Economic Policy Guidelines (BEPGs). Yet the fact is that the Pact is still on the statute books and the European Commission continues to carry out its obligations to monitor Member State fiscal positions.

More countries could well find themselves subject to disciplinary action as they follow in the footsteps of France and Germany by allowing their fiscal deficits to grow. However, and contrary to so much press comment, it is important to note that neither France nor Germany, let alone any of the other countries, was close to being asked to pay fines. Rather, the November 2003 Ecofin decision was about moving to the next--still rather mild stage--in the Pact's procedures, in which the delinquent Member State is asked to report on how it plans to eliminate its excessive deficit. There would be a further intensification of disciplinary action in the form of requiring the Member State to make a non interest bearing deposit before fines come on to the agenda.

Subsequently, the Commission launched an action in the European Court of Justice (ECJ) that can be interpreted as an attempt to bring Ecofin to heel. Formally, what the Commission asked the Court to rule on is not whether or not France and Germany were in breach of the rules, but whether Ecofin was legally entitled to act as it did by choosing not to impose sanctions, despite agreeing with the Commission recommendation. The Commission case was that, if its recommendations were adjudged to be correct, Ecofin was bound to act. In its judgement rendered on 13 July, the ECJ found (largely) in favour of the Commission and annulled the November Council decision. This outcome certainly clarifies the procedural aspects of the Excessive Deficit Procedure (EDP) component of the SGP, but does not necessarily mean that France and Germany will have explicit sanctions imposed on them, because Ecofin will again have to appraise the positions.

The next step will be for the Commission to present a fresh analysis and recommendation, in effect winding the clock back. However, the judgement makes clear that Ecofin has the right to reject any such recommendation, rather than (as it did in November 2003) accepting it, but not acting. The judgement also makes the point that if Ecofin cannot muster a so-called qualified majority, then it simply does not make a decision, thereby putting the EDP into abeyance. This appears to mean that Ecofin can always prevail, with the implication that the SGP is rendered toothless. But if there is clearly a deficit in excess of the 3 per cent limit and no good reason for not taking action as prescribed in the EDP, it would be open to the Commission to return to the Court with a new (and probably robust) case. Indeed, the Court explicitly states (in paragraph 90 of the judgement) that it 'does not express a view as to whether . …

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