Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 1 The Stability and Growth Pact : Status in 2006 Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire Secrétariat général de la Commission bancaire

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB Summary I – Background 1) What is the stability and growth pact (SGP) and why was it set up 2) What are the main principles of the SGP II - The first life of the Pact ( ) 1) A contradiction in objectives and institutions 2) Successes and failures of the Pact 3) Lessons from experience

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB Summary III - The reform of the Pact 1) Reasons 2) Overview of the reform 3) Contradictory assessments IV - Conclusion

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 4 1)What is the stability and growth pact (SGP) and why was it set up ?  The SGP is an agreement to limit budget deficits in countries that are members of the eurozone  The SGP is the concrete EU answer to concerns on the continuation of budgetary discipline in Economic and Monetary Union (German fears)  Adopted in 1997, it strengthened the Treaty provisions on fiscal discipline in EMU foreseen by articles 98 to 104 (essentially 99 and 104)  The full provisions took effect when the euro was launched on 1st January 1999 I – Background

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 5 2) What are the main principles of the SGP ? the SGP consists of three elements  A practical commitment  Involvement by all parties (Commission, member states, Council) to the full and timely implementation of the budget surveillance process.  The political commitment ensures that effective peer pressure is exerted on a member state failing to live up to its commitments.  The SGP is contained in a resolution agreed by the Amsterdam European Council of 17th June I – Background

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 6 2) What are the main principles of the SGP ?  Preventive elements  Regular surveillance to prevent deficits going above the 3% reference value and a debt ratio clearly below 60%  Council regulation 1466/97 and 1467/97 reinforces the multilateral surveillance of budget positions  Submission by all members states of stability and convergence programmes I – Background

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 7 2) What are the main principles of the SGP ?  Preventive elements  Member states having adopted the single currency prepare STABILITY programmes, while those not having adopted it prepare CONVERGENCE programmes.  Stability and convergence programmes must present the following information A medium term objective for the budgetary position of close to balance or in surplus ; The analysis of how changes in economic assumptions would affect the budgetary and debt position.  In addition convergence programmes must present the medium term monetary policy objectives and the relationship of those objectives to price and exchange rate stability. I – Background

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 8 2) What are the main principles of the SGP ?  Preventive elements  The regulation foresees the possibilities to trigger the early warning mechanism in the event a slippage in the budgetary position is identified (art. 6.2 and 10.2 of the regulation 1466/97)  The council monitors implementation of programs and can recommend adjustment measures…  … or to take prompt corrective measures I – Background

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 9 2) What are the main principles of the SGP ?  Sanctions in the SGP  The council imposes the sanctions if a MS fails to take the necessary steps to bring the excessive deficit down First a non interest bearing deposit Converted to a fine after 2 years unless the excessive deficit has been corrected Sanctions do not apply if there is a recession (0,75% decrease in GDP) Restrictive policy from IEB I – Background

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 10 1)A contradiction in objectives and institutions  Monetary Policy is common (almost completely centralised) ECB : it does not consider national needs  Fiscal policy is conducted nationally by the governments of each MS country : serves as a tool to counteract asymmetric shocks which « one size fits all »monetary policy cannot tackle  The compromise of a mutual obligation to participate in a procedure of regular mutual surveillance of their economic and budgetary policies. II – The first life of the Pact (1999 – 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 11 2) Successes and failures of the Pact  A success story (for more than half of EU MS)  All medium and smaller MS (except Greece) have managed to respect the medium term objectives of the Pact, realising budgets in balance or even in surplus  Avoiding – with very short exceptions – excessive deficits II – The first life of the Pact (1999 – 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 12 2) Successes and failures of the Pact  Failures  The larger MS have not succeeded in controlling their borrowing they have passed the red line of excessive deficit  Germany – France – Italy and UK find themselves in the excessive deficit procedure  The sustainability of public debt is not addressed with sufficient by the surveillance, corrections and sanctioning procedures of the pact  The notion of « ownership » of the rules II – The first life of the Pact (1999 – 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 13 3) Lessons from experience  Rules and references values of the SGP are not adapted to the true objective : the sustainability of public debt in the MS.  They are not applied with rigor and equity II – The first life of the Pact (1999 – 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 14 1) Reasons  Not adapted to the new members states  Economic catching up  Need investments in infrastructures  Has not induced MS to take advantage of periods of robust growth to post surpluses or even lower their deficits  In 2004 the rules were not complied by a bloc of countries accounting for nearly 80% of eurozone III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 15 2) Overview of the reform The reform identifies 4 areas where improvement is warranted  Enhance the economic rationale of the budgetary rules to improve their credibility ;  Improve « ownership » by national policy makers ;  More effectively periods when economics are growing above trend for budgetary consolidation in order to avoid pro-cyclical policies ;  Take better account in recommendations of periods when economies are growing below trend ; III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 16 2) Overview of the reform  Basic principles are not affected  The procedure is to be loosened by easing the definition of the concept of “exceptional circumstances”  And lengthening the delay granted to a country to lower the deficit under the 3% limit III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 17 2) Overview of the reform  The first change concerns the definition of a “severe economic downturn” which justifies to term a breach exceptional and temporary  The new regulation suppresses the minus 2% recession criterion  It refers to “an accumulated loss of output during a period of very low annual GDP volume growth relative to its potential”  Commission and Council now have to share the responsibility for this assessment (and for an eventual “leniency” from the beginning) III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 18 2) Overview of the reform  The introduction of pre-formulated “relevant factors”  The reform “fills up” all the definition of relevant factors with a number of ready made attenuating factors  Admission of old requests from MS which had demanded more leniency under the SGP (achieving European policy goals, fostering international solidarity, implementation of Lisbon agenda or R and D and innovation efforts) III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 19 3) Contradictory assessments  Negative view  Insufficient growth, high unemployment and costly stabilisation policy may render compliance with the debt criterion difficult  The growing complexity of the Pact with its newly extended catalogue of ready made justifications and excuses for deficits and debts and with its widened possibilities of prolonging and cumulating delays  The pact reform might serve as a pretext for protecting MS against every sanction of « laxist » budgetary behaviours III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 20 3) Contradictory assessments  Positive view  More flexibility by better differentiation of criteria and rules  Leeway to start costly structured reforms  New rigour with the new benchmark of 0,5% for annual deficit reduction with reference to the cyclically adjusted balance net of one-off measures III – The reform of the Pact (June 2005)

Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 21  The SGP : not the best but better than nothing  A tree is known by its fruits Conclusion