Economic Policy Coordination in EMU: What Role for the SGP?. CEPS Working Documents No. 202, 1 June 2004

The implications of the recent institutional crisis in the EU provoked by the failure of the Economic and Financial Affairs Council (ECOFIN) to impose the sanctions on Germany and France provided for in the Stability and Growth Pact are the subject of this Working Document. The paper situates the debate concerning the application of the Stability and Growth Pact (SGP) in a broader evolution of the struggle between two schools of thought concerning macroeconomic policy-making in the EU: the school calling for a strengthening of competences at the EU level (federal economic government) and the school arguing for preserving national competences for budgetary policy even in the face of the transfer of competence for monetary policy to the European Central Bank (ECB). The paper argues that the SGP is an acceptable comprise between the two schools in so far as it establishes rules to be respected without actually transferring competence to the Council in the field of budgetary policy. Consequently, the SGP has not and does not add to the ‘democratic deficit’ within the EU institutional framework. The paper argues, nevertheless, that the excessive deficit procedure (EDP) puts too strong an emphasis on the government budget deficit and suggests that emphasis on the sustainable level of public debt would ensure a stronger basis for assessing whether a given budget deficit may be considered excessive or not.