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05/12/2016

Brussels makes timid fiscal push to reverse austerity, counter populist wave

Euro & Finance

Brussels makes timid fiscal push to reverse austerity, counter populist wave

Commissioner for Economic Affairs Pierre Moscovici said it would have been "masochist" suspending EU funds for Spain at this stage.

[European Commission]

The European Commission stepped up its efforts to leave austerity behind on Wednesday (16 November) by advocating for the first time a timid expansionary fiscal policy for the eurozone and forgiving Spain and Portugal for breaching EU budget rules.

The political instability in Europe, fuelled by anti-globalisation forces and the success of populist leaders across the continent, has become a serious concern, the EU executive admitted in its autumn forecast, published last week.

The Commission now believes it is high time to change the economic narrative in the eurozone.

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That implies a more conciliatory approach towards the ‘sinners’ of the Stability and Growth Pact and a call for more public spending to spur growth on the continent.

“There is both a need and a window of opportunity to act on the fiscal front at this precise juncture, also to rebalance the overall policy mix of the euro area,” reads the Commission’s communication for a positive fiscal stance for the eurozone, published on Wednesday (16 November).

Given the high level of indebtedness in most eurozone countries and the outstanding requirement to meet the EU’s deficit and debt limits, the Commission’s call is not quite yet the “radical” shift claimed by the EU’s commissioner for Economic Affairs, Pierre Moscovici, who presented the new policy yesterday.

But in Moscovici’s view, the expansionary fiscal push – even small – comes as a response to those who feel let down by globalisation and tempted by extremes.

Italy and Spain test EU’s 'intelligent' use of economic rules

The European Commission is expected to fine Spain on Wednesday (26 July), but it will give two extra years to Madrid to adjust its budget – while the commissioners pledge a solution for Italian banks that will protect small investors.

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Step towards fiscal union

In its communication, the European Commission for the first time urged eurozone member states to reach a fiscal stance of 0.5% of the region’s GDP for next year. The real extra spending requested to euro area members would be inferior, around €30 billion, as the fiscal stance for next year is already slightly expansionary, around 2% of GDP according to Commission estimates.

This timid fiscal stimulus is far from what would be required to lift eurozone output. But Moscovici emphasised it is the first time that the Commission advocates for a fiscal stimulus.

According to Moscovici “there is no question” that the stimulus represents a step forward for deepening the eurozone and “form a budgetary union”, as Brussels urges a coordinated budgetary response from national governments.

The Commission is well aware that such an expansionary policy will draw criticism from countries like Germany and the Netherlands who are capable of increasing their public spending. Despite running a budgetary surplus, Berlin is wary of any additional spending to support the economies of Southern EU member states.

There is a “telling paradox”, the Commission underlined in its communication: “Those who do not have fiscal space want to use it; those who have fiscal space do not want to use it.”

“A more collective approach is needed to overcome the risk of a ‘lose-lose’ scenario for the euro area as a whole,” the document adds.

Southern EU countries in push for anti-austerity alliance

The Greek government has invited the leaders of five southern EU countries, including France, Italy and Spain, to Athens in a bid to forge an anti-austerity alliance.

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Pardon for Spain and Portugal

The slight shift towards Keynesian economic principles was accompanied by a new ‘pardon’ for Spain and Portugal who were both reprimanded for breaching EU fiscal rules last summer.

According to corrective arm of the the Stability and Growth Pact, a “lack of effective action” by Madrid and Lisbon to bring their budget in line should “automatically” lead to a Commission proposal to suspend part of the country’s EU funds.

But in the case of Portugal, the Commission considered that “the risks seem contained” as the budget deviation came  above the threshold by “a very narrow margin” only.

Regarding Spain, the EU executive noted that the country is expected to reach its nominal deficit target for this year (4.6% of GDP). However, it remains off track from its nominal and structural targets for 2017, after Madrid failed to submit a “real” draft budget after an inconclusive election last year that left Spain without a government for more than six months.

“Frankly speaking, you have to be a masochist or a formalist to decide this morning on a proposal suspension of funds,” Moscovici told reporters.

MEPs oppose 'immoral' suspension of EU funds for Spain and Portugal

A broad majority of MEPs spoke against freezing EU funds for Spain and Portugal at a European Parliament session late on Monday (3 October), saying such a decision would be “immoral”, “unfair”, “counterproductive” and even “illegal”.

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Background

In the 2017 Annual Growth Survey, emphasis is placed on the importance of ensuring social fairness as a way to stimulate more inclusive growth, as well as on the need to strengthen competitiveness, innovation and productivity.

The draft budgetary plans for 2017 of Germany, Estonia, Luxembourg, Slovakia and the Netherlands are found to be compliant with the requirements for 2017 under the Stability and Growth Pact.

Ireland, Latvia, Malta, Austria are found to be broadly compliant.

In the case of Belgium, Italy, Cyprus, Lithuania, Slovenia, Finland, their draft budgets for 2017 pose a risk of non-compliance, and might result in a significant deviation from the adjustment paths towards the respective medium-term objective.

France´s budget for 2017, assessed under the corrective arm, is broadly compliant, as the Commission's autumn forecast projects that the deficit will be slightly below the mandatory 3% of GDP in 2017. However, the executive said that there is a significant shortfall in the fiscal effort compared to the recommended level, and the correction would not last in 2018 unless Paris adopts new measures.