EU drags on Stability and Growth Pact reform

While member states disagree on the fiscal rules, the Commission hesitates whether to use its own flexibility interpretation with the refugee crisis. [European Commission[

The refugee crisis has reignited tensions between the champions of strict budgetary discipline, led by Germany, and those who want to ease interpretations of the rules, led by Italy and France.

Italy, Austria and Ireland have formally requested more budgetary leeway under the Stability and Growth Pact due to the “exceptional circumstance” they faced with the influx of refugees over the past year.

The European Commission, which polices the implementation of the pact, seemed open to the idea when assessing the national budgets for 2016, but refrained from making any promises at this stage.

“We need to approach [the refugee crisis] with prudence,” cautioned Pierre Moscovici, Commissioner for Economic Affairs. Speaking at the beginning of October, the French official said Brussels and the national administrations don’t have “enough information” yet to determine with precision the exact economic impact of the crisis on government budgets.

“It is too early for me to say if specific derogations could be applied,” Moscovici said.

Interpreting the rules

The Council of the European Union – representing the 28 EU member states – is expected to deliver its interpretation of how to apply the flexibility clauses included in the Stability and Growth Pact by December. For instance, member states are expected to clarify how cyclical conditions, structural reforms and public investment should be taken into account when assessing national budgets under EU rules.

Although the debate seems technical, it could have significant consequences for Europe’s economic policy, and could end up creating a major clash between the Council and the European Commission, in charge of policing the rules.

However, diverging views among EU countries risk pushing the December deadline.

The new Council guidelines will follow a communication by the Commission, put forward in January, to inaugurate a new era of growth-friendly economic policies: Making the best use of the flexibility within the existing rules of the Stability and Growth Pact (SGP).

While some member states support the executive’s proposal to grant more fiscal leeway for public investment, and the implementation of major reforms, various capitals, including Berlin and Helsinki, think that the Commission went too far.

Germany ‘very skeptical’

“We are very skeptical” about the European Commission’s new approach, a German diplomat told EURACTIV. It should have consulted the member states before producing its communication, he continued, saying that the Council was now ready to water it down. “Now the discussion is in the right place,” the German diplomat said.

The guardians of strict discipline recall the Council’s legal opinion, in which its services questioned the Commission’s view. France, Italy and other EU partners support the new approach.

Italian Prime Minister, Matteo Renzi, fought tooth and nail when he took office to ease the EU’s rigid fiscal rulebook as a way to spur economic recovery. His calls were echoed by Paris. However, German Chancellor Angela Merkel resisted any substantial change to the SPG.

EU sources explained that national governments disagree on how to assess the structural reforms (i.e how to apply qualitative and quantitative criteria), and whether a member state should trigger a request for the application of the flexibility clauses in the spring or in autumn.

There is no common understanding either on whether there should be limits to the accumulation of allowances from several flexibility clauses. Indeed, the executive’s communication does not rule out the possibility that a national government can benefit from more than one of the clauses simultaneously.

The capitals also disagree on whether independent evaluations should be compulsory or voluntary. Member states requesting the use of a flexibility clause are expected to produce a report, ideally endorsed by an independent budgetary body (like the national fiscal council). For some member states, these reports should be made mandatory, according to fiscal hawks.

Spain undecided

Officials explained that the discussions ongoing in the Economic and Financial Committee of the Council are still very technical, and some of the largest economies, including Spain, have not taken any position, raising doubts that an agreement could be reached by December. The The President of the EFC, Thomas Wieser, Thomas Wieser, is expected to present a report by then.

German diplomats stressed that member states should at least agree on the process. Otherwise the European Commission’s interpretation will be the only one available for the assessment of national budgets in 2016.

In light of opposition to the new guidelines, Commission officials recalled that the institution still holds the right of initiative, and that recommendations on national budgets are produced by its own services. The Council’s opinions come later on, as they are based on the executive’s assessment.

The dispute over the Stability and Growth Pact is far from being settled.

Maurice Obstfeld, the IMF’s new chief economist, said the humanitarian crisis posed by the millions fleeing conflicts in Syria and Iraq is likely to strain budgets in some destination countries, such as Germany. 

A Commission spokesperson said that since the interpretative communication was presented last January, the institution "has been working closely with Member States on applying these rules to particular cases." "It is very much the Commission's view that structural reforms, investment and fiscal responsibility can and should go hand-in-hand", the official added.

The interpretative communication on the Stability and Growth Pact, adopted by the College of Commissioners on 13 January, eased the fiscal discipline required of the member states in both the preventive and the corrective arms of the SGP, on condition that they implement structural reforms and boost investment or if their economic environment deteriorates significantly.

The review of the fiscal rules was a promise made to the Socialist group by European Commission President Jean-Claude Juncker in exchange for their support during his nomination. 

Experts consider that the new interpretation brought “real progress” in reviewing the EU’s existing fiscal rules, in particular in the case of allowing a temporary deviation in the corrective arm, when reforms are planned but are yet to be legally endorsed.

The Council's legal service issued an opinion in early April in which it questioned this point of the Commission's communication. The legal opinion pointed out that, in order to consider structural reforms as a “relevant factor” in easing the fiscal targets, they must be adopted by the national authorities “through provisions of binding force, whether legislative or not”. Therefore, a simple announcement of upcoming reforms, no matter how credible and detailed they are, is not enough. The Commission believes that reforms not yet implemented could be taken into account provided that member state presents a reform plan “containing detailed and verifiable information, as well as credible timelines for implementation and delivery”.

The Commission has insisted since then that its communication is legally sound and that it acts within its scope of interpretation.

The Economic and Financial Committee's code of conduct will aim at narrowing the differences of view between the Commission and the Council. But regardless of the outcome of the Council's work, the Commission has said that it will continue applying its own communication.

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