A fine pact

EU budget delinquents have the upper hand

Being a policeman is sometimes harder than being a delinquent. Take the European Commission, taxed with enforcing fiscal rules that underpin the euro, and considering whether to penalise Spain and Portugal for missing budget deficit cutting targets.

Fining countries that persistently flout European budget rules may have been intended as a deterrent never to be deployed. In reality, taking such an unprecedented step would make little sense. Spain and Portugal are already struggling to cut their deficits - a situation that fines would exacerbate. And penalising them when repeat budget offender France has escaped sanctions looks bad. European Union (EU) auditors said earlier this month the fiscal rules were applied inconsistently and criticised the Commission for being too soft on Paris and Rome.

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The EU budget policeman will no doubt argue it has given smaller countries as well as the biggest ones more time to meet budget goals in the past. Nor is it guaranteed that fines will be levied. The Commission could let Spain and Portugal off the hook or recommend that the fine, which can be up to 0.2 per cent of gross domestic product, be set at zero. The problem is this could send a signal that the rules are toothless.

This would hardly be the only flaw in the so-called Stability and Growth Pact. Over time, the rules have grown more complicated. As the Dutch, who currently hold the EU presidency, point out, there are targets, upper limits, and benchmarks for the nominal balance, structural balance, expenditure growth and debt development.

Such complexity makes it easier to game the system and can leave the Commission open, rightly or wrongly, to accusations of favouritism. One idea EU countries are examining is to focus on expenditure and allow a country to increase annual spending only in line with its national medium-term potential economic growth rate.

This may allow governments to be judged on factors they control, but it also has drawbacks. It's hard to correctly estimate potential growth rates, and even EU-agreed methodology can err. With no fiscal union to complement the monetary one, budget rules will always be a compromise and enforcement is often a matter of peer pressure. A determined delinquent can always prevail.