Monday

13th Jul 2020

Glossary of key euro pact terms

1. Stability and Growth Pact (SGP) - Often shortened to Stability Pact, these rules - established in 1997 - commit EU member states to keep control of their public finances and not to exceed the limits imposed for budget deficits or debt.

2. Budget deficits - The budget deficit of a country is essentially its tax receipts minus its public spending. Most governments spend more on schools, hospitals, transport networks etcetera than they receive from their citizens in tax, which results in what is known as a budget deficit. The Stability Pact does not allow a country’s budget deficit to exceed three percent of its gross domestic product (GDP). In fact, under the SGP, Member States are supposed to aim for a budget surplus or at least a budget in balance.

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3. Reference value - These are values - sometimes criticised for being too arbitrary by economists - which set the maximum permissible level for debt and deficits. The reference value for debt is 60 percent of GDP. The reference value for deficits is three percent of GDP.

4. Exceptional circumstances - These are the "get-out clauses" available to a Member State. A country may run an excessive budget deficit if the deficit results from "an unusual event outside the control of the Member State Government" and if the country is suffering a "severe economic downturn" (this is defined as a recession of two percent of GDP in one year).

5. Early warning - This is a report drawn up by the Commission as soon as a Member State’s budget deficit exceeds the three percent limit. It is the beginning of the Excessive Deficit Procedure.

6. Excessive deficit procedure (EDP) - This is the very strict procedure laid down in the Treaty whereby the Commission recommends corrective measures to member states that break the three percent limit in a bid to bring their deficits back below the ceiling. The Council’s decision to suspend the EDP - now ruled illegal - is what caused all the trouble in the first place.

The excessive deficit procedure runs as follows:

Step 1 (art. 104.3) - If the Commission believes that a Member State has an excessive deficit (over the three percent limit), it prepares a report - often referred to as an "early warning". The Commission’s belief that a Member State has an excessive deficit has to be confirmed by the Council - this is usually a formality.

Step 2 (art 104.7) - The Council of finance ministers makes recommendations to the Member States that should bring the excessive deficit under the threshold. These recommendations are not made public. The Member State now has four months to take effective corrective action.

Step 3 (art 104.8) - If no effective action is taken, the Council makes its recommendations public - in an attempt to "name and shame" the recalcitrant Member State.

Step 4 (art 104.9) - If there is still no effective action, the Council gives the Member State a final deadline to take action.

Step 5 (art 104.11) - If there is still no effective action after all this, the Council may impose fines of an appropriate size. It may also "invite the European Investment Bank to reconsider its lending policy towards the Member State concerned".

7. Sanctions (or fines) - Contrary to what many believe, fines are not imposed immediately. The Member State first deposits a set sum with the European Commission (a "non-interest-bearing deposit"). This is converted into a fine if the excessive deficit has not been corrected within two years and shared out amongst the other Member States. The amount of the fine is variable. The maximum permissible fine is 0.5 percent of GDP. This is made up of two parts - a fixed amount of 0.2 percent of GDP and a variable part depending on the size of the deficit.

8. Abrogation - This is what happens when the deficit has been returned to below three percent of GDP. It basically means that the Member State is no longer subject to the excessive deficit procedure.

9. Maastricht criteria (sometimes referred to as "convergence criteria") - These criteria were laid out in the Treaty of Maastricht in 1992 - the Treaty which created the possibility of a single European currency. The criteria are various hurdles which must be climbed before a country is able to join the euro and relate to inflation, deficits, interest rates and exchange rates.

10. Broad Economic Policy Guidelines (BEPGs) - These are a crucial part of economic governance in the EU. Released annually by Member States and scrutinised by the Commission, they are "report cards" for each country’s economy and informs Brussels about the state of public finances in the Member State concerned.

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