Budgetary Coordination in the Eurozone: The Reform of the Stability and Growth Pact

Introduction: The birth of the EMU featured almost unprecedented transfer of sovereignty from the European member states to a newly created European institution. Ever since, the monetary policy has been the sole responsibility of the ECB at least for the countries in the Eurozone. The budgetary policy though still belongs to the domain of the European member states. However, they are not completely free to pursue there own budgetary policy as this is subject of economic governance or either coordination by the SGP. Sound public finances are considered to be a necessary, though not sufficient condition for price stability. The financial crisis and notably the situation in Greece brought a number of new instruments. In addition to a framework for crisis management, the Task Force on Strengthening Economic Governance called for broader and deeper policy coordination through the introduction of a so-called European Semester, allowing the European institutions to assess the draft budget and to come up with recommendations before it is submitted to national parliaments. In this paper we will critically assess the various proposals that have been done to reinforce budgetary coordination, addressing the question what would make the European member states comply under the new rules of the game where they did not under the old ones.