Select Committee on European Union Thirteenth Report

PART 5: Summary of key conclusions

The need for a Stability and Growth Pact

163.  The Committee supports the co-ordination of national fiscal policies across the EU with a view to maintaining sound public finances. Market discipline alone cannot be guaranteed to ensure the sustainability of public finances. A co-ordinating pact or other method of co-ordination between the Member States is necessary to deal with the 'free-rider' problem, the risk of default and to help Member States to prepare for the economic effects of ageing populations in the EU; such a method of coordination should also provide stability for the European Central Bank and the market (paragraph 49).

Proposals to reform the interpretation of the SGP

164.  It should be made explicit that the medium-term target of budgets 'close to balance or in surplus' is to be measured in terms of the cyclically-adjusted budget balance. The common methodology agreed and adopted by the Commission and Ecofin last year should be used to calculate the underlying budget balances for this target; this means that an extra body of experts is not needed to calculate the cycle (paragraph 80).

165.  When monitoring Member States' compliance with the 3 % deficit criterion, the Commission should continue to use the actual deficit-to-GDP ratio. However, when deciding how the Pact is to be enforced, the Council should not treat the 3 % figure as an absolute limit, never to be breached. The Council's decision whether or not to implement the excessive deficit procedure, once a country has breached the 3 % reference value, should take account of the underlying economic situation, including the Member State's position in the economic cycle and possibly its level of debt (paragraphs 81-83).

166.  The Commission's proposal that Member States should set an adjustment path towards the medium-term target of budgets 'close to balance or in surplus' of 0.5 % GDP per year should not be treated by the Council as an enforceable rule, any breach of which would activate the excessive deficit procedure (paragraphs 89-91).

167.  It is important to tackle the fact that the Stability and Growth Pact works asymmetrically across the economic cycle. Furthermore, countries need to be encouraged not to act pro-cyclically in times of boom. The Committee does not, however, consider that the Commission's proposal to apply the sanction of the excessive deficit procedure in good times would be the most effective way of achieving these twin objectives. The Committee shares the concern that the rules of the Pact should not be complicated. The number of situations that lead to the formal sanctions of the excessive deficit procedure being invoked should not be extended, or these measures will lose their force (paragraphs 102-03).

168.  Member States with a low level of underlying debt should be allowed "a small deviation" from the target of budgets 'close to balance or in surplus'. The Government, too, should welcome this move to a more country-specific interpretation of the Pact, as it would allow them to target the UK national priorities of public investment in physical and human capital (paragraph 115).

169.  The Pact should focus more on debt. The stability and convergence programmes of Member States with particularly high debt ratios should contain a clear commitment to an agreed trajectory of reducing debt. In the light of these commitments, the Council opinions on the stability and growth programmes should include guidelines for reducing debt (paragraphs 124-26).

Surveillance over the SGP

170.  To ensure the credibility and proper functioning of the Stability and Growth Pact, situations such as the one last February - when the Council went against the Commission's recommendation and did not send early warnings to Germany and Portugal - must be avoided in the future. The Treaty should be amended to grant the Commission the power to issue early warnings directly to Member States without recourse to the Council. This proposal is in line with the monitoring and surveillance functions of the Commission (paragraphs 143-44).

Enforcement of the SGP

171.  The Commission's role should not be extended beyond the right to issue an early warning direct to a Member State. The Council should remain the final arbiter of all the enforcement procedures enshrined in the Pact. Only the Council should have the power to enforce sanctions through the excessive deficit procedure and to oblige Member States to take specific actions to remedy excessive deficits (paragraph 145).

172.  Peer pressure is the most effective enforcement mechanism currently available in the Stability and Growth Pact. The sanction of fines is a 'nuclear deterrent' only to be used as a measure of absolute last resort (paragraphs 158-61).

Overall General Conclusion

173.  Each of the Commission's proposals—to measure the medium-term target of budgets 'close to balance or in surplus', to encourage Member States to reduce their underlying deficits to achieve this objective, to encourage countries not to act pro-cyclically in times of boom, to allow Member States with a low level of debt to deviate from the 'close to balance or in surplus' target, to encourage highly-indebted countries to reduce their levels of debt—provides Member States with a useful aim and sound objective. However, they should be interpreted as guidelines rather than as rules. Interpreted in an inflexible way that takes no account of the particularities of each individual situation, they would increase the complication of the Pact. This could lead to more transgressions by the Member States and more interventions by the Commission and the Council, which could possibly threaten to undermine the credibility of the very rules that the proposals seek to strengthen. Interpreted in a way that is sensitive to the specific circumstances of each country, the proposals would introduce the necessary extra benchmarks against which the budgetary actions of Member States could be judged and around which peer pressure could be applied in the Council. Such an interpretation should encourage Member States to follow sensible fiscal policies, which could lead to greater stability and growth.


174.  The Committee considers that the Stability and Growth Pact raises important questions to which the attention of the House should be drawn and makes this Report to the House for information/debate.

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