EU Budget Discipline – With Bite

The scoop ultimately belonged to the Financial Times, but that article is ensconced behind their semi-porous paywall. So here at €S we had to get the news from Lidové noviny, from the Twitter alert by @cznews (Oh no! Not Rozpočtoví hříšnici!):

Rozpočtoví hříšnici v eurozóně zaplatí pokutu ve výši 0,2 % HDP: Země eurozóny, které v budoucnosti po... http://bit.ly/9X8tCn #czech #news
@cznews
Czech Business News

And a scoop it truly is, for the FT journalists (Peter Spiegel and Joshua Chaffin) have unearthed proposed “legislation” set to be officially unveiled by Economic and Monetary Affairs Commissioner Olli Rehn next Wednesday, which their article terms “the EU’s most ambitious attempt to reorder its economic governance since this spring’s debt crisis that nearly destroyed the single currency.” Basically, the Commission would step up to take up a role in examining the national budgets of the 16 Eurozone member-states in a big way, with the authority to impose fines of 0.2% of GDP on governments which “consistently fail to bring down their public debt levels” – or “fail to control their annual spending,” or “fail to reform their economies to improve their competitiveness.” Once having decided to fine a member-state, the Commission under the proposal could only be stopped by a qualified majority vote from the European Council within 10 days of the decision. (Similar rules for member-states still outside the Eurozone will apparently be forthcoming later.)

Even just ignoring recommendations about how to improve national competitiveness (from the Commission presumably; and so how can they really be described as “recommendations”?) could make a government liable to a 0.1% of GDP fine. And, somewhat ludicrously, the Commission would also maintain a productivity data “scoreboard,” sort of like the running list of grades on an elementary school classroom wall.

Pretty amazing – especially when those of us with any sort of historical memory (it need not go back any further than ten years or so) recall the Stability and Growth Pact that was a key component to the introduction of the euro at the end of the 1990s. That also prescribed monitoring of (Eurozone) member-states’ public finances by the Commission; and it also prescribed “sanctions” (initially fines) for those governments who continued to violate the fiscal rules (budget deficit less than 3% of GDP, national debt less than 60% of GDP or getting there) after repeated warnings.

But it didn’t work: among the first to break these rules were the giants making up the EU’s “axis,” namely Germany and France, and no one ever dared to try to punish them in any way. Besides, there was always the fundamental bit of illogic in such arrangements of trying to punish by means of a monetary fine a government which has gotten into trouble because it doesn’t have enough money available.

So Why Now?

What’s the difference this time, that makes Commission staff think that these sorts of proposals will be accepted, and that they even will work if enacted to influence member-state government behavior? Obviously it’s the big Greek/Spanish/Portuguese/Irish/etc. debt crisis of 2010, which in May prompted the panicked assembling of a €700 billion+ support fund for states in trouble with their sovereign debt. It’s by no means clear that that will be enough to head off trouble; it’s by no means clear, for example, that Greece will in fact be able to avoid default (or, probably, the same thing camouflaged as debt “restructuring”).

Neither is it clear that member-states will be at all receptive to these latest Commission proposals as they are formally presented next week (together with similar ones from Council President Herman van Rompuy). It’s hard to avoid the thought that this sort of supervision of their budget processes from an external, super-national body of experts, backed up by sanctions with financial teeth, was not what most if not all of them thought they were getting into when they joined the EU and then the Eurozone. That historical process of European integration is likely about to face a decisive “gut check” moment, coming up next week.

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