Fiscal Policy of Europe and the Euro: Past, Present, and Future

To the average observer, the financial makeup of the European Union can appear confusing and convoluted. There are a variety of intersecting treaties, pacts and policies, many of which work in tandem. Particularly given the rocky recent history of the EU, it is important to explore the impact of EU fiscal policy.

History and the Stability and Growth Pact

Since 1992, Europe has been financially unified with the euro as its currency. As the world changed and the economies of its member states developed, the “Eurozone” adopted different policies and strategies to ensure stability and growth.

In 1997, the European Union approved the Stability and Growth Pact (SGP). This agreement created many of the rules and regulations that are important today for the financial landscape of the EU.

There are two major components of the SGP: a “preventative arm” and a “corrective arm.” The first monitors countries to ensure their economies are functioning well, and the second assists member countries who are struggling financially so that the debt and deficit do not spread.

The two key figures set out by the SGP say what a country’s deficit and debt can be. A member state must not have a government deficit greater than 3% of GDP nor a debt of greater than 60% of GDP.

Each country must create medium-term budgetary objectives (MTO), which are goals that say how a country can ensure its economy is stable and developing for the future. The members present these goals to the EU and receive feedback and suggestions – this is how the preventative arm works.

Crisis and the Response

The financial crisis of 2008-09 created new challenges for the economics of the European Union. Several members, especially Greece and Spain, announced massive debts and struggle financially to this day. The EU authorized several bailout programs, but the costs of bailouts were strict austerity measures.

For a compilation of the first few years of the crisis, see The Guardian.

Opponents say the austerity is damaging to growth. There were several protests in countries facing cuts, especially in Greece and Spain, and some argue that cuts to present budgets can slow down the economy and put a country into even more difficulty.

However, others support austerity measures. They are an important tool for maintaining fairness and ensuring that everyone remains part of the EU, even members who are experiencing significant financial troubles. Supporters say austerity measures are a good way to plan rationally for the future.