The non-compliance to the Stability and Growth Pact in the early 2000’s was a direct challenge to the co-operative virtue of EU fiscal governance, and the fact that its occurrence played little role in affecting the stability for Europe’s most significant achievement yet – the Single Currency – was in itself a truly peculiar incident. Betrayed by the deeds of the two locomotives of the European Project, Germany and France, only four years after the adoption of the Euro – yet the currency strides on and none of the adverse effect that Economists feared had happened. But was that it?
The fact that both of these nations could escape sanction by coercing other nations in debt to vote against a punishment for their excessive fiscal deficit announced a deep functional fault in the enforcement of agreed EU treaties on the Commission’s part; and knowing that the stability of the Euro hinged upon an incomplete fiscal federation where fiscal responsibility laid heavily on the shoulders of the member states, there was indeed a commitment crisis exhibiting itself in 2003.
This paper aimed to answer two questions: first, what have caused the member states, such as France and most curiously, Germany, the one who had stressed the need for fiscal discipline every step of the way during the negotiation stage to safeguard the Euro, to renegade on a pact that was supposed to guarantee just that? Second, in light of the silence of the international capital market towards the incident, what, if any, had the demise of EDP contributed to the study of fiscal governance and political integration in the EU?
Table of Contents
1. Introduction
2. Background
3. Literature Review
3.1 Incomplete Fiscal Federation
3.2 The architecture of SGP--- Was the fiscal discipline outlined in Maastricht structurally sound?
3.3 Inter-governmental vs. Supranational: A public-choice approach to non-compliance
4. Empirical Evidence
4.1 Germany and France
4.2 Rest of the Eurozone
4.3 Market Indifference?
5. Conclusion
Research Objectives and Themes
This paper examines the political and structural reasons behind the widespread non-compliance with the Stability and Growth Pact (SGP) during the early 2000s, specifically focusing on the failure of the Excessive Deficit Procedure to sanction Germany and France. It investigates why member states, even those who championed fiscal discipline, chose to abandon these agreed-upon rules and what this implies for the nature of EU fiscal governance and political integration.
- The political economy of fiscal governance in an incomplete federation.
- The clash between intergovernmental interests and supranational rules.
- The failure of the Excessive Deficit Procedure (EDP) as a sanctioning mechanism.
- Empirical analysis of fiscal performance in France, Germany, and the wider Eurozone.
- The role of the Eurogroup and informal governance in EU decision-making.
- Market reactions and the credibility of fiscal constraints in the Eurozone.
Excerpt from the Book
3.2 The architecture of SGP--- Was the fiscal discipline outlined in Maastricht structurally sound?
"I know very well that the stability pact is stupid, like all rigid decisions. If we want to adjust these, unanimity is needed and it doesn't work….The stability pact is imperfect, it's true, because there is a need for a more intelligent tool and more flexibility." ---Romano Prodi, President of the European Commission, in an interview with BBC News, 2002
Policy makers and scholars had long been debating on whether the statuary Maastricht Criteria, which has been transposed to the Stability and Growth Pact, were satisfactory. Although by the words of Marco Buti and Michael Artis, the man who would become Director-General for Economics and Financial Affairs at the European Commission in 2008 and a senior reputable scholar and professor in Economics respectively, that, analysis of budgetary constraint were only applicable in the case where ‘sanctions are fully credible’, in contrast to that ‘situations are imaginable in which the sanctions could be deflected by political coalitions within the ECOFIN Council’ or would otherwise serve only as a benchmark, accompanying with conflicting views from EMI(later ECB) officials and political supporters on whether the Criteria should be interpreted literally or as guidelines only, there is a need to review these strand of literature as to falsify the claim which the criteria were arbitrary and therefore unenforceable.
The arguments for the structural fault of the SGP as a cause to the failure of compliance are two-fold; first was the approach which argues the criteria not being flexible enough for stabilization purposes in recession while growth is slow, i.e. not being compatible with cyclic adjustment, a strand that has been picked up by German and French government officials in their urge for more ‘flexibility’ in the Pact; the other strand, on the contrary, argued that the rule itself was fine, only that the Commission lacked the resources to forecast budgetary balances.
Summary of Chapters
1. Introduction: Presents the central problem of the non-compliance with the SGP by France and Germany and outlines the research focus on the failure of the EDP.
2. Background: Provides a historical overview of the development of EU fiscal governance from the Pre-Maastricht era through the Delors Report to the implementation of the EDP.
3. Literature Review: Discusses theoretical frameworks including fiscal federalism, the structural architecture of the SGP, and a public-choice perspective on inter-governmental versus supranational dynamics.
4. Empirical Evidence: Analyzes the fiscal performance of Germany, France, and other Eurozone members, highlighting the role of electoral cycles and market indifference to the breach of rules.
5. Conclusion: Summarizes that the non-compliance was a political failure rooted in the confederative nature of the EU and the asymmetry between its economic and political integration.
Keywords
Stability and Growth Pact, Excessive Deficit Procedure, Fiscal Governance, European Monetary Union, Political Economy, Germany, France, Maastricht Treaty, Supranationalism, Intergovernmentalism, Fiscal Federalism, Eurogroup, Non-compliance, Budgetary Discipline, Economic Integration.
Frequently Asked Questions
What is the primary focus of this paper?
The paper focuses on the non-compliance with the Stability and Growth Pact by EU member states in the early 2000s, specifically the failure to sanction France and Germany for excessive deficits.
What are the core thematic areas?
The core themes include the political economy of EU fiscal governance, the structural design of the Maastricht criteria, and the dynamics between national governments and supranational institutions.
What is the central research question?
The research explores why member states, particularly Germany and France, abandoned the fiscal pact they helped negotiate, and how this incident reflects on the broader study of fiscal governance in the EU.
What methodology does the author employ?
The author uses a qualitative approach, bridging economic theories of fiscal federalism with public-choice theories regarding sovereignty and political behavior in a multi-level governance system.
What does the main body cover?
The main body covers the historical development of fiscal constraints, a critical review of existing literature on structural faults in the SGP, and empirical case studies of German and French fiscal performance.
Which keywords best characterize this work?
Key terms include Stability and Growth Pact, Excessive Deficit Procedure, fiscal governance, political economy, Eurozone, and fiscal federalism.
How does the author define the EU in terms of its political structure?
The author describes the EU as an "incomplete fiscal federation" and a "sui generis polity" that functions as a quasi-federal system despite its non-hierarchical, intergovernmental nature.
Why did the capital markets remain largely indifferent to the breach of the SGP in 2003?
The market was indifferent because it did not believe there would be credible negative consequences or "spill-overs" from the ECB, viewing the SGP breach as a political event rather than a fiscal crisis.
- Quote paper
- Tom Wan (Author), 2012, Is there a structural or a political fault in the fiscal governance of the EU?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/341402
