Brussels’ legislature adds teeth to earlier deficit & debt norms, plus scrutiny of national budgets; background makes for some scepticism.
As the euro zone teeters on the edge of a sovereign debt crisis that is threatening the global economy’s stability, the European Parliament on Wednesday voted to approve a new set of rules aimed at fixing the design flaw at the heart of the turmoil, namely, the lack of fiscal coordination among the 17 members of the euro monetary union.
In many ways, the new set of fiscal rules, laid out as six pieces of legislation and referred to as the “six-pack,” are simply a revamp of the ‘Growth and Stability Pact’, the original rule book according to which the euro zone’s economic polices were to have been run. The European Commission says the big difference is in the enforcement mechanisms, which have been given sharper teeth.
Thus, as in the case of the Growth and Stability Pact, the six-pack calls for budget deficits of no more than three per cent of gross domestic product (GDP) and a maximum debt level of 60 per cent of GDP. Rule breakers, however, are to now face the real prospect of sanctions, and a new voting system will make it harder for finance ministers to block these.
Countries that flout rules will be pressed early on to make a cash deposit, in a non-interest-bearing account, worth 0.2 per cent of GDP, to be converted into a fine in the event of their failing to correct course. Governments with high debt that resist reducing it by a specified amount may be fined in a similar way.
Other innovations include a ‘European semester’, an annual national budget assessment procedure by the European Commission. The EC will now have greater powers to ask for more budgetary information and conduct spot checks at a national level.
Member-state governments will gain a degree of supervisory input in each other’s budgets before these are passed by parliaments, a move the EC says is a big step toward joint administration of fiscal policy. While national governments will not have the power to force each other to rework budgets, they would be able to exert pressure to make the budget’s assumptions about economic growth, inflation and interest rates as realistic as possible.
In addition, the six-pack establishes an early warning system to spot macro economic imbalances like asset bubbles, including the housing bubbles that later burst in Spain and Ireland. Countries thought to be at risk could find themselves in an “excessive imbalance procedure”, that could also lead to sanctions.
All these changes will take effect in stages, with the rules on debt delayed till 2015.
Although touted as a major step forward by Brussels, the markets are unlikely to be appeased by the move, in large part because of doubts on efficacy of the enforcement of the legislation. The history of euro zone member-states’ fiscal machinations do not give much cause for optimism. Greece’s concealment of its true public finances, much reviled by other members like Germany, was only the most brazen example of consistent rule breaking by most countries, including France and Germany.
When the euro was created in 1999, France met the rules set by the currency’s founders only because of a windfall from the state-owned utility, France Télécom. Overnight, the French budget deficit shrank by 0.5 per cent of GDP. In 2003, Paris and Berlin exceeded the deficit limits set in the Stability and Growth Pact but were able to use their political clout to avoid sanctions and force a revision of the rules that weakened these. There are no guarantees that the six-pack could withstand Franco-German opposition much better.
As a consequence of the ongoing fiscal crisis in Europe, 23 of 27 EU nations are currently deemed to have an excessive deficit, with only Sweden, Finland, Estonia and Luxembourg in the clear.
