On The Reform Of Fiscal Discipline Mechanism Under The Framework Of The Stability And Growth Pact

The rules of the Stability and Growth Pact( SGP) caused substantial doubts since the Pact was adopted in 1997. Portugal is the first country that breached the rules in 2001. The most astonishing is the fact that German, which is the initiator of the Pact, has violated 3% for many years and called the Pact's credibility into question. This has led to intensive debates on rules of the Pact and its implementation. The purpose of this paper is to trace the operation of the SGP starting with its introduction and up to today. Try to find out what have caused the breach of the rules. When assessing the recent developments in the euro-area, the paper tries to find out the possible fiscal discipline reform development in the future.The work is organized as follows:The origin and the description of the Stability and Growth Pact is in the first chapter. I briefly introduce the main content of SGP and the characters of fiscal restriction mechanism in European Union. Then I analyze the reasons of applying fiscal restriction in theory, that is the theory of optimum currency areas and others.Chapter two introduces challenges caused by economic development on SGP and the factors that affect SGP, such as economic slowdown, the enlargement of European Union, the ageing problems and shortcoming of the SGP.Drawbacks of fiscal restriction and suggestions on reform since the introduction of euro and enlargement of European Union are the main contents of chapter 3. I analyze the real actions taken by European Union and suggestions given by scholars. Suggestions on reform are divided into four categories, that is according to whether they advocate new institutions of new procedures, and whether they favor a domestic or an international approach. Finally, recent reforms on SGP and fiscal rules and the prospect of the future reform are presented. On March 20,2005, proposal for strengthening the implementation of SGP was reached. The two anchors of the Pact- the 3%of the GDP reference value for the deficit ratio and the 60% of GDP reference value for the debtratio-provide more flexibility for member countries. In special cases, the ratio of fiscal deficit to GDP can exceed 3% and exempt from punishment, which makes SGP more flexible.