• Growth and Stability Pact is a part of Monetary Union.
• Countries who join the Euro are supposed to sign up to the Growth and Stability Pact
• Basically it means that Governments cannot borrow more than 3% of GDP. i.e. A countries budget Deficit should not be more than a certain amount
• The rationale is that joining the single currency means a common interest rate, set by the ECB. If countries borrow too much it puts upward pressure on interest rates. Therefore, limits on government borrowing are needed to avoid these problems

• It means countries have less flexibility in dealing with economic downturns. In a recession it makes sense to have expansionary fiscal policy. (higher spending and lower taxes) However, this increases the budget deficit. Therefore, to keep government borrowing within the criteria of the growth and stability pact means that the government cannot try and increase AD through fiscal policy.
• It is worth noting in the EURO a country cannot change interest rates, therefore fiscal policy becomes more important
• Many countries have simply chosen to ignore it. This includes France and Germany. As the EU cannot really enforce the growth and stability pact, its impact is obviously lessened.

• Problems recovering from recession
• Disadvantages of EURO
• Benefits of Euro
• Budget Deficits
• Growth and stability pact effectively suspended
  

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