Eurozone Finance Governance Through the Stability and Growth Pact, January 2002-November 2003

EU\u27s Stability and Growth Pact (SGP) sets limits both in government budget deficit and debt for eurozone member countries. The former should be below 3 per cent and the latter should be below 60 per cent of gross domestic product, respectively. They are aimed at ensuring the euro\u27s value in the money markets. A focus of this paper\u27s analysis lies in how the European Commission had fought unsuccessfully to prevent the emergence of a French-led blocking minority among the eurozone countries against its expected recommendation to apply the pact\u27s penalty, a huge fine, to France and Germany for violating its limit of government budget deficit below 3 per cent of gross domestic product three years in a row. At the introduction of the common currency, the euro, the Commission expected Germany to play a role as an anchor for the eurozone finance governance. Germany, however, drifted from its expected position and formed an alliance with less stringent France for more flexible interpretations and applications of the pact by the Commission. Germany experienced difficulties keeping its budget deficit below 3 per cent of gross domestic product amid unexpectedly severe economic slow-down, and domestic opposition to cut-backs in government expenditures and deregulation to stimulate economic growth. When the two largest economies of the eurozone, Germany and France, joined together to press for a softer line in implementing the pact, some other countries moved closer to their position, leaving marginalized several smaller hard-line countries in support of the Commission. This paper traces this process, which culminated in the decision at the Ecofin meeting of EU finance ministers on December 25, 2003 to set aside an application of the SGP penalty provision to Germany and France, and analyzes how the eurozone finance governance failed to work as had been originally expected