Euro zone Stability Pact Abstract: The objective of this paper is to introduce Euro Zone Stability and Growth

Pact and assess, how it relates to professional integrity standards and ethics in financial management. The pact will be reviewed by discussing various aspects including its historical background, how nations coped with the pact and the economic scenario and the amendments made to pact over the time.This paper will also attempt to provide authors stance on the pact and the conclusion. Background: The Euro Zone is an economic and monetary union (EMU) of seventeen European union (EU)member states that have adopted the euro () as their common currency. Currently Austria, Belgium,Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain are the members of Euro Zone. The Euro Zone adopted euro as the common currency in 2002. This decision to introduce euro was taken by then members of European Community at Maastricht in 1992. The objective was to strengthen EU as a global player and reduce distortions arising from different currencies. Member countries of EU agreed on a international institution called Stability and Growth Pact to ensure functioning of EMU. Stability and Growth Pact: The Stability and Growth Pact is an agreement to facilitate and maintain the stability of the Economic and Monetary Union. The pact was adopted in 1997 so that fiscal discipline would be maintained and enforced in the EMU. It is a political agreement laying out the rules for the budgetary discipline of the member states. It is designed to contribute to the overall climate of stability and financial prudence underpinning the success of EMU. During initial negotiations leading up to the establishment of the pact, Germany was the main driving force pushing for more rigid rules. The actual criteria that member states must respect are: an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc.) a national debt lower than 60% of GDP or approaching that value. (above is cited from ********** ) To comply with the requirements member nations need to achieve a 'close to balance or surplus' position and change their budgetary behaviour in periods of cyclical upturns by refraining from spending the 'growth dividend'. Once the countries reach the target , their stabilizers will operate and enable smooth functioning of economy. The potential problems in the implementation of the pact arise during the event of a slow-down in economic activity. //As per the pact, If a country broke the rules, it had to take measures to reduce its deficit. If it //broke the rules in three consecutive years, the Commission could impose a fine of up to 0.5% of GDP. On the //surface this maintained the key rules on deficits and debt, but the small print contained a list of exceptions for types //of spending that would not be counted as part of the debt. This included spending on education, research, defence, //aid and 'the unification of Europe'. However, the reforms have been criticised and during the global financial crash //of 2008 and the ensuing recession, there were calls for the EU to do more to penalise states with excessive deficits. Events after implementing the pact: In 2003 largest economies France and Germany broke the roles as they could not meet them. The commission did not take strict action against them as the two promised to comply as early as possible.In 2005 the commission decided to revamp the pact and to implement more flexible rules. In 2007 France president Sarkozy challenged the pact in order to revitalize France economy outside the framework of SGP.In 2008 SGP warned that average public debt in euro zone could reach 84% of GDP by 2010. SGP worried about levels of pubic debt in Ireland,Spain and France.Moreover Greeces spiralling debt was a major concern.In February 2010, EU leaders promised that the Euro was not in danger and instructed Greece to cut its public spending and raise taxes to repay its

debt. In May 2010, euro-zone states and the IMF agreed to a 'Stabilisation Mechanism' - a fund that low interest loans could be drawn from. In late 2010 and 2011 Ireland,Portugal and Greece sufferred from financial problems and received bail out packages from European Financial Stability Facility. In March 2011 EU member states adopted a new reform considering European Sovereign Debt Crisis.This is intended to impose stringent penalties in case breaches of either deficit or debt rules.

//The Stability and Growth Pact is under fire. Problems have appeared in sticking to the rules. Proposals to reform the //Pact or ditch it altogether abound. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal //rule, its design and compliance mechanisms fare reasonably well. Where weaknesses are found, they tend to reflect //trade-offs typical of supra-national arrangements. In the end, only a higher degree of fiscal integration would //remove the inflexibility inherent in the recourse to predefined budgetary rules // Fiscal discipline to safeguard the credibility of the single monetary authority and fiscal flexibility to respond to country-specific shocks are two core principles governing budgetary policy in EMU. The Stability and Growth Pact aims at ensuring the first objective. To comply with the requirements of the pact, EU members need to achieve a 'close to balance or surplus' position and change their budgetary behaviour in periods of cyclical upturns by refraining from spending the 'growth dividend'. Past experience shows that fiscal laxity does not buy more effective stabilization. Once EMU countries have achieved their medium-term target, their automatic stabilizers will be able to operate fully, thus helping in smoothing out cyclical fluctuations. The main potential problems in the implementation of the pact may arise in the early years of EMU, during the transition to a balanced budget, in the event of a slow-down in economic activity.// //

The preventive arm Under the provisions of the preventive arm, Member States must submit annual stability or convergence programmes, showing how they intend to achieve or safeguard sound fiscal positions in the medium term taking into account the impending budgetary impact of population aging. The Commission assesses these programmes and the Council gives its Opinion on them. The preventive arm includes two policy instruments. The Council, on the basis of a proposal by the Commission, can address an early warning to prevent the occurrence of an excessive deficit. Using the policy advice, the Commission can directly address policy recommendations to a Member State as regards the broad implications of its fiscal policies The dissuasive arm The dissuasive part of the Pact governs the excessive deficit procedure (EDP). The EDP is triggered by the deficit breaching the 3% of GDP threshold of the Treaty. If it is decided that the deficit is excessive in the meaning of the Treaty, the Council issues recommendations to the Member States concerned to correct the excessive deficit and gives a time frame for doing so. Non compliance with the recommendations triggers further steps in the procedures, including for euro area Member States the possibility of sanctions.//

Section 2: <how it relates to professional integrity standards/ethics in financial management> Fiscal discipline to safeguard the credibility of the single monetary authority and fiscal flexibility to respond to country-specific shocks are two core principles governing budgetary policy in EMU. The Stability and Growth Pact aims at ensuring the above objectives. The pact aims at collective economic prosperity of all the member nations. If one of the nations experiences glitches while coping with the pact and the global economic scenario, the EU could take necessary action in assisting the nation overcome its financial problems and embark growth track. Therefore, as far as the pact is concerned it is high in professional integrity standards and ethics. The SGP is a political totem, a symbol that euro-using countries will not cheat each other. (The Economist, 24 October 2002). 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" or "result from a severe economic downturn. ( http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm). This point of the agreement emphasises the importance of professional integrity and acts a benchmark for ethics. Disappointingly, many countries had difficulty meeting the SGP rules. At first in 2003, the largest economies in the euro zone, France and Germany, breached the rules. As per the protocol they had to face the consequences of violating the protocol. But using their political power they saved themselves from any sanctions and these countries promised to reach the SGP targets as soon as possible. So the Commission did not take strong action against them. This is a violation of financial integrity, where the consequences are difficult to predict. Moreover this is also an ethical violation as major economies used their influence in saving themselves from stringent actions. Even though SGP was revamped with more flexible rules for more fruitful results in 2005, Nicolas Sarkozy challenged them in 2007 in the interests of his nation. This is sheer unethical behaviour from France president. Frequent breaches made by most of the member nations resulted in non culmination of the goals of pact.Even there was point of time when mistrust prevailed among all the member nations. The fact that Finland and Luxembourg are the only member nations that adhered to the pact since its implementation stands as a proof that there is poor professional integrity among the EU nations. Finally, to enlarge confidence in this mutual selfcommitment of all member countries, the political obligations have been codified. This makes it possible to take legal actions at the European Court of Justice (Court) to clarify, who has violated the treaty.

Section 3: <what you found, your stance on the topic (e.g. recommendation), and conclusion.> Considering the events that spawned after implementing Stability and Growth pact and the way EU nations reacted to the economic scenario we come up with following recommendations. 1) Many member nations not heeding to the rules of the pact at different points of times since its inception gives a feeling that Stability and Growth pact is more of a guardian of European public finances than a mechanism to foster European economic growth. Mere stating of the rules/objectives and absence of describing a means to achieve them makes the pact weak and dubious. Means to achieve the goals should be properly stated and the member nations should adhere to it. 2) National stability and convergence programmes should be introduced in respective national parliaments before submitting to the Commission. European parliament should have active role in discussing and approving them. 3) In the cases of slow economic activity and economic downturn if it too difficult for the pact to as a coordination mechanism. Instead the pact should be amended at the times of emergency to enable the member nations better deal with the scenario.

The Stability and Growth Pact is not less democratic than many other EU decisions but can still be improved, most notably via the introduction of a requirement to have national stability and convergence programs discussed and when possible approved by national Parliaments as well as discussed by the European Parliament which would be required to reach an opinion on each of the programs.

Also the sanctions mechanism has lost its credibility and needs to be strengthened. That strengthening can only be obtained through the enforcement of the decision making procedure which inevitably implies more powers for the European Commission rather than via the softening of sanctions. However the best solution to improve the sanctions mechanism would be the improvement in the co-ordination of economic policies which would necessarily imply that Member States would be less likely to be subject to any sanctions. Henceforth, the main conclusions of this paper are that the stability and growth pact should continue to exist and in order to be more effective when ensuring fiscal discipline, its sanctions mechanism should be reinforced. It should also pay closer attention to national debt values and a rule similar to the one governing deficit values should be created for debt levels. Nonetheless, the stability pact is important and should continue to pursue its role of ensuring fiscal discipline, especially in line with the demographic crisis. It should however have a more prominent role as far as economic policy co-ordination is concerned. Given the existing degree of political integration in EMU, however, internal adjustment rather than attempting to redesign the rules from scratch appears a more suitable way to bring about progress Section 4: <You must also include a separate page of references (no less than 6 unique references).> 1)BERLIN | Sun Nov 27, 2011 7:43am EST http://www.reuters.com/article/2011/11/27/us-eurozone -integration-ecb-idUSTRE7AQ00F20111127 Germany, France plan quick new Stability Pact: report France and Germany are planning a quick new pact on budget discipline that might persuade the European Central Bank to ramp up its government bond purchases, Welt am Sonntag reported on Sunday. 2)http://www.telegraph.co.uk/finance /financialcrisis/8934487/Eurozone -leaders-in-make-or-break-rescue-talks.html

3) http://www.guardian.co.uk/world/2003/nov/27/qanda.business The Stability and Growth Pact (SGP) is an agreement, among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union. Based primarily on Articles 121 and 126[1] of the Treaty on the Functioning of the European Union, it consists of fiscal monitoring of members by the European Commission and the Council of Ministers and, after multiple warnings, sanctions[2] against offending members. The pact was adopted in 1997[3] so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them. The actual criteria that member states must respect are: an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc.) a national debt lower than 60% of GDP or approaching that value. The SGP was initially proposed by German finance minister Theo Waigel in the mid 1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German economy's strong performance since the 1950s. The German government hoped to ensure the continuation of that policy through the SGP, which would limit the ability of governments to exert inflationary pressures on the European economy. 4) NOVEMBER 28, 2011, 11:30 AM GMT http://blogs.wsj.com/source/2011/11/28/euro-zone -pact-one-step-forward-two-steps-back/?mod=google_news_blog Euro Zone Pact: One Step Forward, Two Steps Back

5)http://online .wsj.com/article/BT-CO-20111128-707054.html Nov 28th 2011 Just one para... Europe markets were in a broad rally, with the Stoxx Europe 600 soaring 3.1%, after news reports over the weekend suggested euro-zone leaders were planning a new stability pact to contain the sovereign debt crisis. A new agreement, including measures to curb excessive debt by making budget discipline legally binding, could persuade the European Central Bank to take more action to halt the selloff in debt markets. 6)http://online.wsj.com/article/BT-CO-20111128-707054.html NOVEMBER 28, 2011, 9:08 A.M. ET US Stocks Leap After Euro-Zone Pact Reports,Black Friday Aids Retail Sector 7)http://ec.europa.eu/economy_finance/economic_governance /sgp/index_en.htm The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the economic and monetary union (EMU). It was established to safeguard sound public finances, an important requirement for EMU to function properly. The Pact consists of a preventive and a dissuasive arm. 8) http://www.euronews .net/2011/02/03/merkel-promises-euro-zone -stability -pact-soon/ 03/02/11 18:51 CET German Chancellor Angela Merkel has pledged the euro zone would take crucial steps by March to strengthen economic stability.

From 2002 on, the Euro has become the common currency of twelve member countries of the European Union (EU). To ensure the functioning of this European Monetary Union (EMU), its member countries agreed on the Stability and Growth Pact (SGP). This institution should guarantee members economic homogeneity before the introduction of the currency and internal stability of the Euro-zone afterwards. Its economic sense and nonsense has been discussed during the 1990s as well as recently, especially because countries violating the SGP used their political power within the EU-system for saving themselves from any sanctions. In this paper therefore I want to discuss (1) what the SGP and the economic reasoning behind it is; (2) if it has worked or not (and why) with special respect to the question of backlashes between the SGP and the political economy of the EU; and (3) what lessons for the future of the EMU and the global exchange rate system can be learnt from this experience so far The Euro is the common currency of twelve member countries of the European Union (EU) since 2002. Its introduction was decided on ten years earlier in Maastricht mainly to strengthen the EU as player in the global economy and to reduce the uncertainty and distortions that originated in more than a dozen different currencies in use within the common market. Before enlargement, there where only four of them left. To ensure the functioning of the European Monetary Union (EMU), the member countries of the EU agreed on a special international institution (although some scholars refer to it simply as rule), the so called Stability and Growth Pact (SGP). This institution should guarantee (as much as possible) economic homogeneity of the members of EMU before the introduction of the currency and internal stability of the Euro-zone afterwards. Its economic sense and nonsense has been discussed during the 1990s as well as recently. Especially several countries not meeting some of the so called convergence criteria (like France, Germany, Portugal) also use their political power within the EU to deprive this institution of its possible strength.

The paper is organized as follows: In the first part the SGP is presented, its evolution from earlier forms of monetary collaboration, its basis in the Maastricht Treaty, its content as a pact with special emphasis on the convergence criteria, and finally (in brief) the economic reasoning behind it. The second part contains some data related to the question, if the SGP has made the achievements hoped for. The question of backlashes between the SGP and the political economy of the EU will be a central point of the analysis in this part. In the third and final part I want to discuss, what lessons can be learnt by Europe and the World from the European experienc All concrete goals to be reached (the narrow inflation, interest rate, and exchange rate corridors, the concrete numbers representing budgetary discipline) in fact have been introduced to foster economic convergence before and hopefully during the monetary union at the respective rates and levels. o This is especially true for the criteria measuring inflation, because large inflation differences between countries put pressure on the exchange rate and therefore these countries cannot form an optimum currency area (and may also have problems in forming an operating one). This is measured by the inflation rate criterion in the short run, while the interest rate criterion has been introduced to measure inflation expectations in the long run. o The exchange rate criterion has been implemented to integrated market forces into the system as some kind of automatic stabilizers and as controlling forces. If the market believes that convergence will be sustainable enough, than the exchange rate will not be seriously revalued by the market. o Also the budgetary criteria are due to putting pressure on the countries to guarantee this sustainability. Large deficits may lead to inflation in the medium run and a high debt ratio means more danger of budget deficits in the long run. o Finally, to enlarge confidence in this mutual self-commitment of all member countries, the political obligations have been codified. This makes it possible to take legal actions at the European Court of Justice (Court) to clarify, who has violated the treaty.

http://homepage.uibk.ac.at/~c43207/ die/papers/sgp.pdf

Conclusion is good in this paper: http://www.notre-europe.eu/uploads/tx_publication/Policypaper9_02.pdf