Economics, 3rd Edition

CASE STUDY

Critics of the SGP suggested that when it came to the 

test it failed to impose discipline. 

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776  PART 15  INTERNATIONAL MACROECONOMICS

The Fiscal Compact

The problems with the debt crisis faced by a number of European countries in the wake of the financial 

crisis and the attempts to keep the euro area together led to the negotiation of a treaty which came in to 

force on 1 January 2013. This has become known as the fiscal compact but its full title is the Treaty on 

Stability, Coordination and Governance in the Economic and Monetary Union. The intention of the fiscal 

compact is to:

strengthen the economic pillar of the Economic and Monetary Union by adopting a set of rules 

 intended to foster budgetary discipline through a fiscal compact, to strengthen the coordination of 

economic policies and to improve the governance of the euro area, thereby supporting the achievement 

of the European Union's objectives for sustainable growth, employment, competitiveness and social 

cohesion.

The treaty echoes some of the features of the SGP in that it requires the budgets of participating 

member states to be in balance or in surplus and that the structural deficit does not exceed 0.5 per cent of 

the country’s nominal GDP. A