Without Reform the Stability and Growth Pact Will Remain Ineffective for Countries like Italy

In order to ensure the functioning of the Stability and Growth Pact (SGP), it is necessary to simplify its rules and establish an independent monitoring body. This is the conclusion of a study on the reform of the SGP conducted by Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), Mannheim, on behalf of the European Parliament.

The Eurozone could be put to yet another test in autumn, when the new Italian government presents its first budget. If the governing parties put only a minor part of their election promises into practice, this will most likely result in a dramatic increase of the Italian government deficit as well as a severe violation of the SGP. ZEW research department head Professor Friedrich Heinemann summarises the findings of the study as follows:

“The official guide to the SGP consists of over 200 pages. It has become so complex that only a few experts understand the SGP in all its details. Populist governments in the Eurozone can take advantage of this complexity: For instance, many arguments can be derived from the large number of exemption clauses to justify excessive debt levels.

The SGP needs to be simplified and an independent monitoring body

The fact that the European Commission has been very lenient in its interpretation of the SGP in the past years will now take its toll in the imminent conflict between the European Union and the Italian government. For the SGP to be finally effective again, it is necessary to adopt a dual strategy. Firstly, the rules of the SGP need to be simplified. There are currently various parallel fiscal targets that incentivise highly indebted governments to choose the path of least resistance and cherry-pick the most convenient fiscal target. Concentrating on a small number of key parameters like expenditure growth and the government debt ratio would be a major progress for the Eurozone.

Secondly, the EU Commission should be overseen by an independent body that would be responsible for publicly monitoring the Commission’s compliance with its margin of discretion. The ‘European Fiscal Board’ is an example for an institution with great potential to fulfil this task. This would also be a decisive step towards increasing the credibility of the SGP. Without reform, the Stability and Growth Pact will remain ineffective and will not be able to prevent countries like Italy from putting the survival of the Eurozone at risk through excessive debt.”

For more information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de