ECB attacks Commission’s easing of fiscal rules

Noch zögern europäische Banken, Investitionen im Iran zu finanzieren. [Kiefer]

The European Central Bank has criticised the Commission’s easing of EU fiscal rules as “counter-productive”, in its latest economic bulletin published Monday (2 November).

The ECB’s concerns focus on the structural reform clause, which is aimed at granting additional fiscal room to member states to balance their public accounts, as reforms could carry short-term costs. Evidence shows that only a small set of structural reforms appear to have direct short-term budgetary impact. Therefore, this clause should be “carefully applied”, the ECB said in its latest economic bulletin.

Moreover, the European Central Bank warned against granting additional fiscal flexibility to member states under the excessive deficit procedure, with reform plans only announced and yet to be implemented, as the Commission´s new approach permits.

Giving this extra time to meet the 3% deficit threshold before reforms are implemented would require “continuous monitoring” of the national governments’ efforts and enforcement actions in case the promised reforms are not implemented. “Otherwise countries may have an incentive to delay or even backtrack on their plans once the fiscal flexibility has been granted,” the ECB said. Therefore, the use of this clause could be “counterproductive”.

The use of this ex-ante clause has been the most controversial element from the outset of the executive´s communication. The ‘hawkish’ camp, led by Germany and the Council’s legal services, believe that the European Commission overstretched the Stability and Growth Pact.

>>Read: EU drags on Stability and Growth Pact reform

In the ECB’s view, the use of this clause is hampered by the difficulty to assess implemented structural reforms. This exercise entails a large amount of data, as it requires not only judging the adoption of the new piece of legislation itself, but also various implementing rules. Therefore, “quantifying the impact of implemented structural reforms is subject to a high level of uncertainty”.

Looking at the empirical and research experience, the ECB notes that the net effect is difficult to estimate in, in terms of labour and product market reforms. Only a “systemic” pension reform seems to negatively affect the national coffers in the short run. Even more, in some cases the reforms bring a short-term positive fiscal impact, like tightening unemployment benefits.

In light of the difficulty of estimating reforms, the ECB recommends a “cautious application”. If used, the ECB recommends applying this clause in a “clear and transparent way”, in order to avoid unequal treatment among the member states.

>> Read: Commission vague about fiscal leeway for refugees

France, Belgium and Italy have already profited from this reform clause. The French case raised eyebrows in Brusselss, as it was the third time that Paris obtained additional time to balance its public accounts, this time around thanks to Pierre Moscovici, the French Commissioner and former member of François Hollande’s government. Smaller member states, including Portugal and Ireland stressed the need of equal treatment for all 28 member states.

In order to avoid further tensions, ECB President Mario Draghi has insisted in recent months on the need for an institutional overhaul to bolster the economic governance. In his view, the rule-based approach, represented by the SGP, “can only really be credible if they are applied with very little discretion”, he said last March. But in the EU, “the fiscal rules have repeatedly been broken and trust between countries has been strained”.

>> Read: Draghi calls for ‘quantum leap’ in eurozone integration

For that reason, Draghi called for a shift toward an institution-based system as the basis of “more credible and more flexible policymaking”.

The Italian central banker left his fingerprints on the Five Presidents’ Report, which recommended the setting up of national competitiveness councils to keep track and shape policies aimed at fuelling the EU’s output. The Commission put forward its recommendation for these bodies on 21 October.

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 for member states under the excessive deficit procedure (EDP), when reforms are planned but are yet to be legally endorsed.

The European Commission’s communication confirmed that the implementation of structural reforms will be considered a relevant factor under the EDP to ease the adjustment path. In the absence of a sound methodological framework to estimate the budgetary effects of structural reforms, the EU executive assesses eligibility for the structural reform clause on the basis of a dedicated reform plan – submitted by the Member State in spring in the context of the annual update of the Stability and Convergence Programmes. The programme needs to include detailed and verifiable information, as well as a credible timeline for adoption and delivery of the envisaged reforms.

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

The Economic and Financial Committee of the Council is expected to issue a new code of conduct by December to narrow 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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