EXECUTIVE SUMMARY

The Stability and Growth pact, agreed at the Amsterdam summit in 1997, had, as its main objective ensuring the stability of the Euro zone to the strong currency Members States, despite the fact that it would include the Mediterranean countries. Therefore, it emerged as a mechanism to overcome the feeling of mistrust that existed at the time. In addition, it aimed at preventing free riding behaviour in the monetary union. However, it only committed countries to a given deficit level without ensuring economic policy co-ordination as countries could not surpass the three percent threshold, aiming in the medium term to budget equilibrium, but it was left to Member States to decide what was the best way to attain that objective.

However, given the absence of relevant elements of economic policy co-ordination, the stability and growth pact also started to assume that role, something that eventually led to its failure as it had not been sized up to perform that function. 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. Hence, it should be coupled with a rule inspired on the golden rule of public finance which would allow Member States to invest in Community competence areas, such as the ones agreed in Lisbon. The main objective of such a measure is to make public investment compatible with fiscal discipline. Indeed, fiscal discipline and public investment should not necessarily move in opposite directions, especially because economic growth and full employment are goals the EU tries to reach.

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.

In addition, the SGP should be coupled with a different pact that would incorporate the golden rule of public finance whereby investments in line with the Lisbon strategy would be exempted from the deficit calculation. The bottom line is that countries should not be sanctioned if they invest in growth oriented projects. The crucial points would be to clearly define the items that should be included in the golden rule. That definition wo uld have to obey a set of European criteria. The projects involved, proposed either individually or by more than one Member State, would be evaluated by an expert group set up by the European Commission which would make an opinion, the final decision would be taken by the Council which would vote on the basis of a Commission proposal.