Member states should renew fiscal vows

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Polish Prime Minister Donald Tusk, Portugal Prime Minister Pedro Passos Coelho and Romanian President Traian Basescu during the signature ceremony of the fiscal compact agreement at the European Council Summit in Brussels, Belgium, 2 March 2012. [EPA/POOL - FRANCOIS LENOIR]

In 2012, all but two EU member states committed themselves to strengthening the rules and institutions that govern their national budget preparation processes by signing the European Fiscal Compact. However, little has been done since, writes Michal Horvath.

Michal Horvath is a lecturer in economics at the University of York and a permanent secretary at the Network of EU Independent Fiscal Institutions.

Six years on, the member states show little appetite to re-state the same principles in an arguably more binding form and entertain simplifications in what has become an arcane system of European budgetary oversight.

As a consequence, an important opportunity to make the EU more resilient through handing back power to states – a goal that national leaders are otherwise verbally keen to champion – might be missed.

As part of its 6 December 2017 package of proposals, the European Commission presented a directive that would implement the European Fiscal Compact into EU law.

By doing so, it was in effect helping the signatory states make good on a promise they had clearly stated in the Compact. At the same time, the Commission has a legal mandate to review the experience with Europe’s common budgetary rules – the Stability and Growth Pact – since its latest round of revision after the crisis.

These initiatives are underway while many EU economies still lack a clear and credible budgetary plan that supports growth at present and gets their debt down to more moderate levels over time so that they are in a better shape to weather the next downturn, when it comes.

Such a budgetary plan should be set out according to rules adopted with broad political support by national legislatures and enforced in a robust institutional dialogue at the national level. In addition to making the EU system of budgetary commitments more democratically accountable, such an institutional setup should also lead to better outcomes, as studies on the issue indicate.

The proposed Directive, as currently worded, would re-affirm – in more concrete terms relative to the Compact – the commitment to such a system. It would explicitly hand a lot of control over budgetary affairs to member states, as long as their conduct is consistent with a commonly defined long-term target for public debt. Together with an envisaged later review of the Pact, the result could be a much simpler system, with a lot less intrusion “from Brussels” in the absence of gross failures.

The role of national law, national parliaments, and national independent bodies in navigating the economies and their budgets through the choppy waters of an uncertain world would, as a result of these changes, become more prominent.

The Commission’s initiatives, however, have been met with a cool reception in Council structures so far. According to country officials, the reactions from member states have ranged from surprise to outright dismissal.

For some, the Fiscal Compact is an agreement that endorsed and encouraged a premature tightening of belts in countries that could afford to be more generous towards their citizens, and indirectly towards their neighbours too. They feel no need to give more prominence to this agreement and elevate it to EU law that is enforceable through EU courts.

Others see the Compact as a significant step in promoting the idea of budgetary responsibility at the national level. But they too are wary of opening discussions as they fear that a fragile system could end up being weakened in times of relatively solid recovery in living standards around the EU.

The current system that has been criticized for its complexity, lack of transparency and effectiveness in day-to-day application could then survive as the lowest common denominator. This could, in turn, leave many EU economies yet again in a weak position for the times ahead.

There have been countless calls from national leaders for a return of budgetary powers to member states over the years. They should embrace the opportunity that their past selves have created, engage with the proposals tabled for discussion, and not be deterred by past grievances or the fear of regulatory slack in good times.

Past reforms to the system of EU budgetary rules happened when national public finances were under strain, which almost necessarily had an imprint on the outcome. The relatively quiet times EU economies go through at present offer a favourable backdrop for a cool-headed reflection and re-affirmation of mutual commitments among member states. It is an opportunity not to be missed.

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