Getting Pedantic on the Stability and Growth Pact

♠ Posted by Emmanuel in at 1/02/2010 06:40:00 AM
There are any number of misunderstandings out there on the nature of the European Union's Stability and Growth Pact (SGP) that I cannot allow to pass. Most famously, the SGP's provision that no member country should run a fiscal deficit larger than 3% is not an absolute criterion. I was reminded of this while reading a Wall Street Journal article discussing debt concerns in the EU:
The focus in early 2010 will remain on Greece and its budget deficit at 12.7% of GDP, four times the EU limit. The Greek government is trying to hammer together a political consensus in parliament for a plan to bring down public spending without triggering more social unrest seen in the country's streets at the close of 2009.
Simply, this is incorrect. The most recent SGP advisory allows member countries to breach the 3% limit during recessionary periods. From EurActiv comes this summary:
The pact binds all parties to engage in the prompt implementation of the excessive deficit procedure (EDP)external , should any of them fail to meet the agreements of the pact. The procedure is enforced when a member state is running a deficit on public expenditure over revenue, of over 3% of its gross domestic product (GDP) in any year. Additionally, governments may also not allow total government debt to exceed 60% of GDP. Member states are required to report the level of their debt to the Commission promptly, which in turn relays this information to the EcoFin Council and the Monetary Committee.

If a country is found to be in serious breach of the protocol, the Commission can recommend that the Council take action against it. The EDP protects member states from action if their deficits "result from an unusual event outside the control of the member state concerned and has a major impact on the financial position of the general government" [an 'asymmetric shock'] or "result from a severe economic downturn (if there is an annual fall of real GDP of at least 2%)".
2%+ contractions cover a lot of EU countries--including perpetual offender Greece. It's a small point but it's something we'd expect a newspaper like WSJ not to miss. Better reporting next time...