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Options for Europe – Part 55

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).


Chapter X The Stability and Growth Pact – neither growth nor stability

It is often thought that the Stability and Growth Pact (SGP), which is an integral part of the EMU, was agreed to in Maastricht. The fact is that the Maastricht Treaty left the fiscal side of the EMU up in the air. The Treaty included articles relating to the coordination and monitoring of Member State budgets and the ‘excessive deficit procedure’ but suggested that the detail, which was outlined in the Protocol attached to Article 104, would require further legislation and incorporation into the Treaty. The scene was thus set for further negotiations. The SGP was finally adopted formally in 1997. The final SGP essentially amended Articles 121 and 126 of the Treaty on the Functioning of the European Union (Treaty of Rome) with reference values specified in the Protocol on the excessive deficit procedure, which is one of the annexes that applies to both the Treaty on European Union (originally agreed in Maastricht) and the Treaty on the Functioning of the European Union, the overarching document that defined the EEC in 1958.

The final form of the SGP, was motivated by a Memorandum circulated in November 1995 by the German Finance Minister Theodor Waigel, which outlined the structure of what he termed a ‘Stability Pact’ (Waigel, 1995). The genus of this ‘Communication’ came after the German Federal Constitutional Court ruling on the October 12, 1993, which gave the green light to the German Parliament to approve Germany’s entry into the EMU on the condition that price stability would be a primary objective of the monetary system and that the entry conditions would “not stand in the way of withdrawal from the Community as a last resort if it proves impossible to achieve the stability sought” (German Federal Constitutional Court, 1993: 29). The Court’s decision and the publicity that surrounded the case brought brought hometo the German government the degree of public hostility about the impending EMU membership. The national obsession with price stability was at the forefront of the debate within Germany and was focused, initially, on a discussion about the European Monetary Institute (EMI), which would begin operation on January 1, 1994. This was epitomised in Chancellor Kohl’s insistence that it be located in Frankfurt near the Bundesbank (see earlier discussion).

There was growing public anxiety within Germany about the EMU and deep suspicions among the politicians and technocrates as to the capacity and more importantly, the commitment of several prospective European states to fulfill the convergence criteria outlined in the Maastricht Treaty. In 1994, inflation rates in some nations were still persistently high (for example, Greece 10.9 per cent, Italy 4 per cent, Portugal 5.2 per cent and Spain 4.6 per cent) and fiscal deficits were well in excess of the proposed 3 per cent rule (for example, Belgium 5.2 per cent, Greece 8.3 per cent, France 5.5 per cent, Italy 9 per cent, Netherlands 3.5 per cent, Portugal 7.1 per cent, Spain 7.2 per cent).

In an article that appeared in the influential Franfurter Allgemeine Zeitung (FAZ, 1994) on February 14, 1994, Theo Waigel responded to the growing public alarm by publicly naming the European nations that he considered were taking the Maastricht convergence criteria seriously (Germany and Luxembourg) and those that he believed were flagrantly abusing them (Greece, Italy, Portugal and Spain). He told the newspaper that he was “disappointed that the convergence criteria were not respected” by the Southern nations. The Germans felt that the budgetary surveillance by the European Commission was not strict enough to see all prospective nations satisfy the Stage III criteria. At the June 26-27, 1995 European Council meeting in Cannes, it was affirmed that “it is important for all Member States to make the necessary efforts with regard to convergence, this being a pre-condition for introduction of the single currency” (European Council, 1995a).

The pressure on the German government to do something about the public concern intensified during 1995. Heipertz and Verdun (2004: 7) provide an account of how the Bundesbank President, Hans Tietmeyer “engineered” a public intervention in 1995 by the President of the German association of cooperative banks (Bundesverband der Volksbanken und Raiffeisenkassen (BVR)), Wolfgang Grüge to demand “an intergovernmental stability treaty” with tight fiscal rules. The Bundesbank President “did not want to be associated publicly with a new initiative on hardening the EMU regime”. Other interventions from think tanks and the public media pushed the debate along within Germany. Waigel responded during the debates around the Federal government’s Budget Bill in November 1995.

During the Second Reading of the German Budget Bill in the Deutscher Bundestag on Novmeber 7, 1995, Waigel stressed his view was that each country proposing to go to Stage III had to be in “strict compliance with words of the Maastricht criteria” (“Ihr gutes Recht und Ihre nationale Pflicht ist es, sich bei der strikten Einhaltung der Maastricht-Kriterien zu Wort zu melden”) (Deutscher Bundestag, 1995a: 5671). He said that while his political opponents were talking of “D-Mark nationalism” (“D-Mark-Nationalismus”) in relation to the design of the EMU, the reality was that the Maastricht criteria would be a sold basis for stability as long as they were enforced. Waigel told the Bundestag that “I am proposing a Stability Pact for Europe as a binding committment by the participants in the third stage of the EMU” (“Ich habe bereits im September einen ergänzenden Stabilitätspakt für Europa als bindende Selbstverpflichtung der Teilnehmer an der dritten Stufe der EWU angeregt” p. 5672).

He indicated that the ‘Stability Pact’ should limit total fiscal deficits to 3 per cent (in unfavourable periods). In normal periods, the deficit should never exceed 1 per cent of GDP (“Das Staatsdefizit darf auch in wirtschaftlich ungünstigen Perioden die 3-Prozent-Linie von Maastricht nicht mehr über schreiten. Ein Defizitziel von 1 Prozent in wirtschaftlichen Normallagen wird mittelfristig angestrebt” p. 5672). So this would represent a tougher fiscal rule than that set out in Maastricht.

On November 10, 1995, Waigel submitted his proposal for consideration at the Ecofin Council meeting in Brussels on November 27, which had been asked to provide input to the upcoming Madrid European Council in December. Waigel said that “the stability of the European currency will be reliably and permanently secured through strict budgetary discipline in all the participating countries” and that “strict observance of the convergence criteria and the institutional safeguards of the Treaty of Maastricht are the preconditions for a successful” EMU. He recommended that the “stability criteria … be precisely stated and operationally defined” (Waigel, 1995).

After considering the Memorandum ‘over lunch’, the Finance Ministers “agreed that it was important to pursue policies which would ensure sound budgetary positions” but that they “should be continued in accordance with the procedures and principles of the Treaty” (Ecofin, 1995). The wording was pointed. Anything that would happen would be within the existing legal framework of the European Community. Waigel was not only attempting to impose harsher rules but also work outside of the normal European Commission institutions. As part of his proposed ‘Stability Pact’, he wanted to secure an intergovernmental agreement to set up the “European Stability Council” which would manage the surveillance and compliance processes of the Pact. It would impose harsh penalties (a “stability deposit”) equivalent to 0.25 per cent of GDP on nations that breached the rules. The deposit would become a fine if the breach went beyond two years. He also proposed other sanctions such as “restricting access to the resources of the structural funds” for nations that exceeded the upper limit. France immediately rejected the proposal mostly on the grounds of the automaticity of the fines while Spain and Italy were against the convergence criteria per se. The Dutch, as to be expected sided with Waigel. After debate, the Ministers proposed to water down Waigel’s system of automatic fines.

In retrospect, this was never going to be a viable plan for Europe. Waigel failed to make a case where the rules he wanted rigidly enforced could underpin economic growth and low unemployment. There was just a continued assertion of the faith that if there was price stability then “transaction costs for business and consumers” would be low and investors would be encouraged. Further, the idea that a nation, facing a major decline in private spending, which had forced it into deficit above 3 per cent, would then face a significant fine, was almost idiotic. The penalty would further reduce the ‘offending’ nation’s capacity to provide fiscal support to the economy in bad times and worsen unemployment. We will return to that issue later in the discussion.

Despite many European economies suffering under the burden of the austerity that had been imposed as part of the convergence criteria, the Madrid European Council meeting held on December 15-16, 1995 agreed that the starting date for Stage III would be January 1, 1999 “in accordance with the convergence criteria” and declared that the new currency would be called the euro. (European Council, 1995a). So the politicians minds were focused but there was also a growing backlash among economists who saw unemployment continuing to rise during 1996 as the Member States pared back spending in an attempt to meet the convergence criteria. Friend (2001: 67) noted that “even in Germany, economists and politicians insistently questioned whether employment should be sacrificed to the god of budgetary strictness worshipped by the Bundesbank”.

These tensions came to a head during the European Council meeting in Dublin on December 13-14, 1996. The official conclusions of the meeting are relatively benign and include the recognition that the “principles and main elements of the Stability and Growth Pact for ensuring budgetary discipline in EMU have been agreed” (European Council, 1996). But the shift from Waigel’s ‘Stability Pact’ to the SGP was not without drama. Friend (2001: 67) wrote that during discussions of Waigel’s ‘Stability Pact’, French President Jacques Chirac and German Chancellor Helmut Kohl “were screaming at each other”. Chirac had told a TV show prior to the meeting that the ‘Stability Pact’ had been conjured up by “certain German technocrats” (Waigel and German State Secretary Jürgen Stark) (p. 67) and there was an argument between Waigel and his French counterpart, Jean Arthuis which led to the latter railing against the automatic penalties and telling Waigel that “What you are proposing is a computer that takes the decisions. Policy by Software” (p. 67).

The Franco-German discord continued on the second day of the meeting until a compromise was reached about the triggers for the excessive deficit procedure and the automatic fines were dispensed with. It was also agreed to insert the term ‘Growth’ into the Pact and so Waigel’s ‘Stability Pact’ became the SGP. Further, the SGP would provide some deficit leeway above the 3 per cent for nations that were enduring a major recession. To satisfy the German technocrats, the Council decided that a nation could exceed the 3 per cent threshold if it was in ‘severe recession’, which they defined as a decline in GDP of more than 2 per cent.

The inclusion of ‘Growth’ into the Pact name was a reflection of the fact that unemployment had topped 11 per cent in France during 1996 and the Government of Alain Juppé, elected in May 1995, was starting to flag in the polls. He had already faced humiliation in having to withdraw his plans to cut back the Welfare System and public sector employment conditions (the Juppé Plan) after a series of national strikes paralysed the country. The rising unemployment only made his popularity decline further. The biggest transport strikes were on-going as France went to the Dublin Council meeting and as a matter of political necessity, France could not be seen to be siding with the German proposal that seemed to negate the capacity of national governments to introduce discretionary spending measures designed to combat recession.

The French had one some small but relatively meaningless concessions as we will see in later discussion.



Additional references

This list will be progressively compiled.

Deutscher Bundestag (1995a) ‘Stenographischer Bericht Plenarprotokoll 13/66’, Bonn, Tuesday, November 7, 1995.

European Council Economic and Financial Affairs Committee (Ecofin) (1995) ‘Press Release’, Press: 341, Nr 12026/95.

European Council (1995a) ‘Presidency Conclusions’, Cannes June 26-27, 1995.

European Council (1995b) ‘Presidency Conclusions’, Madrid, December 15-16, 1995.

European Council (1996) ‘Presidency Conclusions’, Dublin December 13-14, 1996.

Heipertz, M. and Verdun, A. (2004) ‘The Dog that Would Never Bite? What We Can Learn from the Origins of the Stability and Growth Pact’, CGPE Working Paper 04-06, January.

FAZ (1994) ‘Nur zwei Länder erfüllen die Maastricht-Kriterien’, 15 February 1994.

Friend, J.W. (2001) Unequal Partners: French-German Relations, 1989-2000, Westport, CT, Praeger Publishers Inc.

German Federal Constitutional Court (1993) ‘Decision of the German Federal Constitutional Court of October 12, 1993
In Re Maastricht Treaty’, BVerfGE 89, 155.

Waigel, T. (1995) ‘Stability Pact for Europe’, Communication to the Ecofin Council, November.

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

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