Public Finances in EMU-2007. Ensuring the effectiveness of the preventive arm of the SGP

Abstract

Surveillance and co-ordination of economic and budgetary policies in Member States is a requirement of the Treaty. The Stability and Growth Pact (SGP) develops the provisions of the Treaty into a set of commonly agreed rules, principles and procedures that contribute to the design, the surveillance and the co-ordination of budgetary policies in the EU Member States. The SGP includes a preventive part and a corrective part. Its functioning depends on whether deficits are considered excessive or not. In the former case, the excessive deficit procedure foresees pre-defined and codified corrective actions, recommendations and sanctions, which serve its deterrent function. The functioning under the preventive arm of the SGP, the aims of which are to avoid the occurrence of excessive deficits and ensure fiscal and economic coordination in the EU, is different. The preventive arm, although relying on a combination of numerical and procedural rules as the corrective part, focuses mainly on medium-term planning, peer support and pressure and exchanges of best practices. To function effectively, it requires a common understanding of the economic and fiscal policy challenges in the EU, and a strong political commitment to address them.