Monday 22. July 2019

EU stability pact: interpreting the rules to suit

Despite high budget deficits, Spain and Portugal have been spared the sanctions of the EU stability pact for the time being. This decision is being met with a lack of understanding, and is one that illustrates the need for a joint fiscal policy.

The head of the Eurogroup, Jeroen Dijsselbloem, expressed disappointment at the end of July. Others have criticised the fact that the Stability and Growth Pact (SGP) had once again fallen victim to political interests. Shortly before the summer recess, the EU Commission decided against imposing sanctions on Spain and Portugal. Although the executive body, together with the Council of Finance Ministers, had recently introduced a sanction procedure, for the time being the Commission declined to impose fines in this case, which could have amounted to as much as 0.2% of the GDP.


This would have been the first time that a Eurozone member would have been made to pay for its high level of national debt. Since 2009 both countries have worked with the EU Commission to try to reduce their debt levels. According to the Stability and Growth Pact rules, new borrowing of maximum 3% of GDP and a public debt of 60% of the economic output are allowed. Although it started from a record high level of 11% in 2009, Spain has consistently reduced its deficit towards its target level, but at 5.1% still has not achieved the guideline figure. In similar vein, the Portuguese government has only managed to reduce the country’s public debt down to 4.4%. The Commission has also found that neither country has introduced effective actions and even, over recent months, both countries have gone back on agreed reforms by introducing tax cuts and pay rises for public sector employees.


Flexible but complex rules


This back-and-forth has reignited the debate on the content and application of the stability agreements. Since 2005, the EU has successively tightened up and expanded the pact, which protects the euro from expansive budgetary policies and inflation. In the preventive arm of the SGP, Member States and the Commission seek to prevent a breach of the debt limits at an early stage. The member countries are obliged to reduce their debt by imposing medium-term objectives that are close to a balanced budget. If the stability provisions are breached, the stricter measures of the corrective arm come into play. In addition, since 2011 the Commission has also been able to introduce sanction procedures in the case of excessive macroeconomic imbalances, such as high balance-of-payments deficits or property bubbles and its decision-making is now less dependent on the Council of Ministers. Nowadays, the Council is able to refuse sanctions only on the basis of a qualified majority vote.


The EU has also tried to make the regulations more flexible. In 2002, Romano Prodi, the then President of the Commission, criticised the agreements as “stupid”, as they were forcing Member States to make savings even during economic crises and thus preventing them from making essential investments. According to EU Commissioner for Economic and Financial Affairs Pierre Moscovici, the Pact is today “more intelligent”, since the Commission nowadays is allowed to take into account severe economic downturns, reform efforts, and extraordinary expenditures when calculating deficits.


Too much scope for political interests


However, the current situation demonstrates that the revisions have created a complex set of rules that allow too much scope for politically based decisions. When the EU opened sanction proceedings in mid-July, the pilloried Spaniards and Portuguese argued that France had also been in breach of the deficit limits since 2009. Commission President Juncker merely stated that sanctions against the Hollande government would not be discussed “because it’s France”. The fact that in the end no sanctions were imposed on Spain or Portugal also has to do with the German finance minister Wolfgang Schäuble, who showed no interest in financial penalties and intervened at the Commission on behalf of his Spanish colleague and party family associate Luis de Guindos.


The solution – let us dare more Europe and more democracy


The solution can only be a European one: in 2013, the Glienicker Group, an association of well-known German economists, lawyers and political scientists, proposed the introduction of a European economic governance. Its French counterpart, the Eiffel Group, as well as a group of eminent academics grouped around star economist Thomas Piketty, support their proposal. The economic executive should have clear rights of intervention in the budgets of heavily indebted states, and also be provided with its own budget enabling it to support reforms in states affected by crises. It should be elected and controlled by a Euro-parliament composed of representatives from national assemblies or the EU Parliament.


This would mean that in future, sanctions could no longer be blocked by the Member States themselves, but be decided upon by a democratically controlled institution. This would bring the focus back onto the concept of stability and push political interests into the background.


Markus Vennewald



Translated from the original text in German

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