Tuesday, June 5, 2007

EU Growth and Stability Pact

Hello i was just going over my notes and was finding it diffcult to find out about the growth and stability pact can you please help as i do not no which bits are relevent and which are not

  • Growth and Stability Pact is a part of Monetary Union.
  • Countries who join the Euro are supposed to sign up to the Growth and Stability Pact
  • Basically it means that Governments cannot borrow more than 3% of GDP. i.e. A countries budget Deficit should not be more than a certain amount
  • The rationale is that joining the single currency means a common interest rate, set by the ECB. If countries borrow too much it puts upward pressure on interest rates. Therefore, limits on government borrowing are needed to avoid these problems
Problems of Growth and Stability Pact

  • It means countries have less flexibility in dealing with economic downturns. In a recession it makes sense to have expansionary fiscal policy. (higher spending and lower taxes) However, this increases the budget deficit. Therefore, to keep government borrowing within the criteria of the growth and stability pact means that the government cannot try and increase AD through fiscal policy.
  • It is worth noting in the EURO a country cannot change interest rates, therefore fiscal policy becomes more important
  • Many countries have simply chosen to ignore it. This includes France and Germany. As the EU cannot really enforce the growth and stability pact, its impact is obviously lessened.
See also:

1 comment:

Anonymous said...

so how about if the EU allowing more flexibility in the stability and growth pact,what will they cost and benefit from it ?