«Russia and the World Community’s Respond to a Challenge of Instability of Economic and Legal Systems Materials of the International Scientific-practical Conference ...»
The preferred objective of convergence program is to show an intension and ability of government to strengthen fiscal position and mutual coordination of relevant economic policies. Stability and convergence program defines objective in management of public budgets upon which European Commission compares objective with reality. In case it comes to inconsistencies of objectives with reality, EC starts so called “recommendation process” or excessive deficit procedure.
The last important part of pact is implementation of excessive deficit procedure, which sets penalization of country breaches rules of pact. Sanctions imposed on concerned state can reach 0,5 percent of GDP. Member state has to deposit this payment at commission without interests. At the same time state has to take action to cut down government deficit. In case of failure, European council determines of not returning the deposit and his conversion on penalty.
Under the Council Regulation (EC) No 1467/97 of 7 July 1997 are sanctions adjusted as follows: Whenever the Council decides to apply sanctions to a participating Member State in accordance with Article 104c, a non-interest-bearing deposit shall, as a rule, be required. The Council may decide to supplement this deposit by other measures. When the excessive deficit results from nonThis paper/publication is the result of the project of Operational Programme Science & Research: Creation of excellent workplace of economic research for solving the challenges of civilization in the 21st century (ITMS 26240120032). We support research activities in Slovakia / Project is co-funded by EU funds.
compliance with the criterion relating to the government deficit ration in Article 104c, the amount of the first deposit shall comprise a fixed component equal to 0,2 % of GDP, and a variable component equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 % of GDP. Each following year, until the decision on the existence of an excessive deficit is abrogated, the Council shall assess whether the participating Member State concerned has taken effective action in response to the Council notice in accordance with Article 104c. If an additional deposit is decided, it shall be equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 % of GDP. Any single deposit referred to in paragraphs 1 and 2 shall not exceed the upper limit of 0,5 % of GDP.
Overrun of government deficit over reference value 166 is considered as exceptional and temporary, as a consequence of exceptional occasion without control of member state and with great impact on financial position of government, or as a result of great recession. Besides that, overrun of reference value is considered as temporary when budget prognosis present by commission indicate that deficit moves down after leaving of strange events or recession.
Reformed pact from 2005 had limits for budget deficit 3 % of GDP and debt 60 % of GDP, yet it eases in corrective part of rules, because it includes wide range of reasons to excuse the extensive deficit. On the other hand, reform slightly tighten up the preventive part of pact – in so called good times when economy flourish, member states have to save and reduce deficit 167.
Argument for transnational rules Institutionalization of abidance of rules of healthy fiscal policy opens question, whether these rules should be part of national legislative, or a transnational (European) agreement is needed. Why should the following of balance budget be part of European legislative? First argument for transnational determination of rules for budget discipline is based on fact that in compare with national authority liable to government is more likely its enforcement. Even when reasons for deficit are just matter of home economics and politics, every government prefers following international agreements because their violation brings more costs and especially loose of trust and prestige in the world. Genuine solution would be enshrining of balance budget to constitution what have to be respected by all governments regardless of their party affiliation or other factors. Good example is practice in United Kingdom, where deficit can be raised only by investments. This national rule is clever: debt is burden for the future, but investments will be contribution in the future, so the possibility to finance investments by deficits just time-aligns benefit and cost.
Reference value: Protocol on the excessive deficit procedure explicitly set the reference value of deficit rate (3% GDP) and debt rate (60% GDP) and Protocol on criteria of convergence referred to article 121 of the treaty, define the calculation methodology of reference values used in research of convergence in price and the convergence of long term interest rates.
Third chapter of this wok is dedicated to reformed Stability and growth pact in detail Second reason relates with loose of independent national monetary policy, that in ordinary circumstances acts as a catalyst or corrector of expansive decisions of government. In the case of monetary union, implications of expansive fiscal policy of one government expand to every countries of monetary union. It means that part of costs of growing deficits in one country is divided between every member of monetary union – what on the other hand can inspire country in debt to increase a deficit once again. If the country has its own monetary policy with floating exchange rate, it is probably that increasing of budget deficit will result in increase of short term interest rate (response of central bank for preservation of price stability) but also in increase of long term interest rate (by reason of higher inflation expectation of financial markets). Last but not least, exchange rate acts as corrector of all unbalances. This process doesn’t work for monetary union, where monetary policy responds only to circumstances related to all union and not only to development of individual members.
Government deficit in countries of European Union In time of adoption of common currency in 1999, we witnessed violation of the principles of pact. There were more violators: Portugal (2001), Germany and France (since 2002), Netherlands (2003), Great Britain (2003 and 2004), Italy (since 2003) and Greece (constantly since 1997 but deficits were declared in 2005). In 2006 only two countries of eurozone Italy and Portugal got over allowable limit of 3 percent. From new member states didn’t meet the Stability and growth pact Hungary, Poland and Slovakia. Evaluation of implementing of SGP The stability and growth pack represented a set of rules for coordination, discipline and potentially sanctions of states that do not enforce principles for rational and balanced fiscal policy. Comprehensive framework of various rules, observances, standards and regulations are in form of non-binding recommendations, eventually alternative possibilities without binding character. Basically Pact should be flexible as long as it does not reach the deficit limit of 3 percent of GDP. Otherwise enforcement i.e. implementation of Pact and in the first place related penalty measures without exceptional should be executable. It was neither in case of Germany nor France. These two countries were unprecedented breaching three percent limit without any sanctions for a few years. On the basis of relatively short existence of original pact and related development in public finance we can state that pact was not realize consistently and because of that was not effective. On the other hand there is another qualified opinion for its existence. Let put the question, what would be the situation of public finance if national governments were not forced to consolidate national budgets under threat of possible sanctions resulting from pact?
We can evaluate pact as generally successful till 2000. It succeeds in reducing deficits of individual countries of EU every year but at the end of nineties of 20. Century process of consolidation of public finance stopped. It occurred in Statistical Annex of European Economy, Spring 2007, European Commission decreasing of tax burden without adequate steps on expenditure side of budget what caused another increasing of deficit. Politicians left their objectives and first Portugal (2001) and later Germany and France exceeded permitted limits.
By an irony of fate, exactly these two big countries originally initialized Stability and growth pact, when they were afraid of possible instability of common European currency. SGP – the critical comments Many questions stay open and at the same time in a certain measure they have also political context. During short history of Maastricht’s criteria there are questions of justness of balanced fiscal policy. Generally work that moderate fiscal policy creates optimal conditions for monetary policy to the price stability.
Independent central bank represents right institute to guarantee price stability. On the other hand it needs partner, who prepares adequate fiscal environment so it doesn’t have to come up to radical solutions.
Stability and growth pact was target of criticism right from the beginning.
Critics were most from labour unions and other associations representative of employers, as well as representatives of academia. They argued that with single monetary policy it is not appropriate to restrain possibilities of administration of economic policy by means of fiscal policy. Fiscal policy should represent the main task in anticyclic management of economy. Simultaneously it is necessary to bear in mind specific needs of individual countries at what neither monetary nor fiscal policy can individually react. Absence of sovereignty of both policies can lead to the negative impact on national economy like smaller real growth performance.
Large economies as Germany, France, or Italy had low economic growth rate in 2001-2005. 171 Monetary policy of European Central Bank with threepercent 172 interest rates obstruct to start their economies and because of that with help of public expenditure they tried but they also had to (social expenditure) slow down drop of real GDP growth. There are different opinions on causes of slow growth performance of eurozone. Besides rigid rules of SGP there are for example often mentioned structural and other economic differences between members of monetary union, what complicates realization of single monetary policy, insufficient elasticity of labour market, asymmetry prohibitive effective coordination of monetary, fiscal or eventually structural policy, high taxes, factual absence of fiscal solidarity, essential differences in tax systems of member states, excessive regulation of business activities, unsolved problems (especially high costs) of common agricultural policy, over bureaucracy of decision procBetween 1989-1993 deficit in countries of EU rose by 3,8% to 6% rate on the GDP.