The Stability and Growth Pact and the Political Economy of Fiscal Coordination in the Eurozone
This chapter is devoted to the analysis of the political economy of fiscal coordination in the eurozone, with a focus on the Stability and Growth Pact, its 2003 crisis and its reform in March 2005.
The origins of fiscal coordination in the EMU are to be traced to the Maastricht Treaty. From an institutional point of view, the Maastricht treaty and its protocols resolved the long-lasting controversy between the ‘monetarist’ and the ‘economist’1 approaches to monetary union. This was possible on the one hand by establishing a rigid institutional framework with a clear-cut economic objective (that of pursuing price stability) and a three stage timetable to achieve EMU (Gros and Thygesen 1998), and on the other hand by devising a set of convergence requirements that applying member states had to respect before entering. These requirements included permanence in the ‘new’ ERM (within 15 per cent bands up and down) for at least two years; inflation rates no more than 1.5 per cent higher than the average of the three most virtuous member states; interest rates no more than 2 per cent higher than the average of the three most virtuous member states; a debt-toGDP ratio not exceeding 60 per cent, subject to conditions; and, most importantly a deficit to GDP ratio not exceeding 3 per cent (TEU art. 104(c) and art. 109 (j)).