What is the Stability and Growth Pact, and how does it affect the euro?
The Stability and Growth Pact (SGP) was introduced, with strong German support, in 1997 to deal with concerns that value of the euro could be undermined by uncontrolled government debt in some countries. The pact requires governments to keep budget deficits below 3% of GDP, and to balance their budgets in the medium term. It gives the EU power to penalise governments that exceed this limit. Initially, the ‘medium term’ was seen as meaning ‘by 2004’. In June ’02, the EU diluted its commitment to achieve balanced budgets by 2004 by granting France the right to ignore the pact if its economic growth fell short of 3%, and by agreeing to bring national deficits “close” to zero by that date. It began to appear that the Commission might take action against Portugal because its budget deficit was over the limit of 3% of GDP (3.9%) – this would have meant Portugal losing effective control over its own tax and spending policies. However, in September ’02, in the face of increasing economic probl
