This page is currently being updated. You can find all the latest news on our new monetary policy strategy and price stability objective on our strategy review hub page.
Fiscal policies have a significant impact on economic growth, macroeconomic stability and inflation. Key aspects in this respect are the level and composition of government expenditure and revenue, budget deficits and government debt. Fiscal discipline is a pivotal element of macroeconomic stability. The need for fiscal discipline is even stronger in a monetary union, such as the euro area, which is made of sovereign states that retain responsibility for their fiscal policies. There are no longer national monetary and exchange rate policies to respond to country-specific shocks, and fiscal policies can better cushion such shocks if they start from a sound position.
A number of institutional arrangements for sound fiscal policies have been agreed at the EU level, also with a view to limiting risks to price stability.
- the prohibition of monetary financing (Article 123 of the Treaty on the Functioning of the European Union),
- the prohibition of privileged access to financial institutions (Article 124 of the Treaty on the Functioning of the European Union),
- the no-bail-out clause (Article 125 of the Treaty on the Functioning of the European Union),
- the fiscal provisions to avoid excessive government deficits (Article 126 of the Treaty on the Functioning of the European Union, including the excessive deficit procedure), and
- the Stability and Growth Pact (secondary legislation based on Articles 121 and 126 of the Treaty on the Functioning of the European Union).
Additionally, the fiscal compact (as part of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) foresees the implementation of a balanced budget rule at the national level and a further strengthening of the excessive deficit procedure within the Stability and Growth Pact.
Excessive deficit procedure
The basic rule of budgetary policy enshrined in the Treaty is that Member States shall avoid excessive government deficits. Compliance with this rule is to be examined on the basis of reference values for the general government deficit (3%) and gross debt (60%) in relation to GDP, whereby a number of qualifications can be applied.
In particular, only an exceptional and temporary excess of the deficit over the reference value can be exempt from being considered excessive, and then only if it remains close to the reference value.
The decision as to whether a Member State is in a situation of excessive deficit lies with the ECOFIN Council, acting upon a proposal from the European Commission.
If the Council decides that a Member State is in a situation of excessive deficit, the excessive deficit procedure provides for the necessary steps to be taken. These could lead to imposing sanctions on the country concerned.
Stability and Growth Pact
The Stability and Growth Pact provides an operational clarification of the Treaty's budgetary rules. It defines the procedures for multilateral budgetary surveillance (preventive arm) as well as the conditions under which to apply the excessive deficit procedure (corrective arm). The Pact is an essential part of the macroeconomic framework of the Economic and Monetary Union. By requesting Member States to coordinate their budgetary policies and to avoid excessive deficits, it contributes to achieving macroeconomic stability in the EU and plays a key role in securing low inflation and low interest rates, which are essential contributions for delivering sustainable economic growth and job creation.
The main rationale of the Stability and Growth Pact is to ensure sound budgetary policies on a permanent basis. The Pact lays down the obligation for Member States to adhere to the medium term objectives for their budgetary positions of 'close to balance or in surplus', as defined under country-specific considerations. Adjusting to such positions will allow Member States to deal with normal cyclical fluctuations without breaching the 3% of GDP reference value for the government deficit.