Italy and the Stability and Growth Pact

Abstract

The vision of an economic and monetary union came to be realized within three stages. The limitations for capital movements were removed, the Economic Monetary Institute was founded and when the convergence criteria were met, the joint currency was launched. Italy did not pass the debt criterion to enter into the third stage of the Economic and Monetary Union (EMU) but passed all the other criteria and was accepted. The Stability and Growth Pact (SGP) was founded in 1997 to strengthen the budgetary surveillance of countries within the EMU. It consisted of two Council regulations and a Council resolution. In 2005 the SGP was reformed and from that point a lot clearer to interpret. For example, it had been hard to interpret the importance of the Other Relevant Factors (ORF) and which to include in the decision making of an excessive deficit with the unreformed SGP but after 2005 there were clear guidelines to follow. The same year as the reformation the Commission filed a report regarding Italy, the state had a deficit above the 3% reference value and might have an excessive deficit. The Commission found that the deficit was neither temporary nor exceptional which suggested that the deficit criterion of the SGP was not fulfilled. They also found that the debt ratio was not sufficiently diminishing and approaching the reference value at a satisfactory pace and thereby they did not fulfil the debt criterion. The Commission was of the opinion that there existed an excessive deficit in Italy. The Council was of the same opinion and gave Italy strong recommendations to follow for a correction of the excessive deficit. In 2006 and 2008, two follow-up reports about action taken by Italy for the correction was sent from the Commission to the Council. The first one found that there was no meaning to continue the Excessive Deficit Procedure (EDP) and the second one, sent in 2008, was about an abrogation of the decision of the existence of an excessive deficit in 2005. The Council also carried this out. No more than a year after the abrogation a new process started and Italy was once again found with an excessive deficit. The EDP was anew in full action. In a report in 2010 the Commission found that Italy had under the circumstances, amongst other the widely spread economic downturn, taken the adequate action for a correction of the excessive deficit within its time limit. The Council once again agreed and no further steps of the EDP were taken at this stage. Italy has, under the entire time period presented in this paper, failed to reach the debt and deficit criteria and have been acted on in accordance with the SGP. The changes or clarifications if you rather call it that, of the SGP has been of major help to the Commission and Council in their opinions, decisions and recommendations regarding the existence of an excessive deficit and its correction. Without the changes, the outcome for Italy might have been different.