The Stability and Growth Pact (SGP) adopted shortly before the start of monetary union establishes binding fiscal rules for the participating countries. The aim of the SGP was and still is to put fiscal policy in a straitjacket assigning it an overall minor role in the EMU. To this end, the aim of the SGP from the beginning was to achieve a public budget that tends to be balanced over the business cycle (see Chapter 3). In the first phase of the EMU many countries violated the SGP terms, in some cases by a long way (see Figures 7.9 and 7.10). Even the larger member states such as Germany and France had public budget deficits higher than 3 per cent of GDP, thereby failing to comply with a core rule of the SGP. In response, the ECo tried to enforce appropriate sanctions against the delinquent countries. However, the ECo was called off by ECOFIN, resulting in no sanctions being imposed. On the contrary, in 2005 the rules of the covenant were softened considerably (see Chapter 7 for details).

For the advocates of the SGP these developments were a nightmare. The former German finance minister, Theo Waigel, under whose eyes the pact had been agreed, criticized the 2005 reforms in no uncertain terms: “The Kohl government enforced the Stability Pact in 1997 against fierce resistance. That Germany then failed to meet the criteria of the Stability Pact in 2002 and 2003 and instead of immediately correcting its sins, amended the Pact together with France was a mortal sin. In this way, rules and standards lose trust” (Waigel 2015: para 9). His position was shared by the Deutsche Bundesbank, among others, and reflected the attitude of parts of the political and scientific elite in Germany (Euractiv 2006).

The onset of the financial market crisis and the subsequent Great Recession led to a sharp rise in budget deficits across Europe. An expansive fiscal policy was implemented to combat a sharp downturn in all EMU-countries, however, it lacked coordination. As early as 2009, Germany decided to end expansionary fiscal policy and reduce its budget deficits.