ECB warns against weak application of deficit rules

Valdis Dombrovskis and Pierre Moscovici [European Commission]

The ECB issued a strong warning to the EU institutions on Friday (9 September) about the “long-term consequences” of poor implementation of the fiscal rules, in the aftermath of the partial pardons given to Spain and Portugal, after they missed their deficit targets.

Speaking after the informal Eurogroup meeting held in Bratislava, Benoit Coeuré, a member of the ECB’s Executive Board, insisted that the Stability and Growth Pact must be implemented “in a transparent, consistent and predictable” manner. Otherwise, the institutions would put the whole fiscal framework “at risk”, he warned.

Brussels willing to grant Spain more time to submit fiscal measures

EU officials have responded with a conciliatory tone to Spain’s difficulties in meeting agreed fiscal targets as new elections loom in December to break the ongoing political stalemate.

Although Coeuré said that he was not commenting about Spanish and Portuguese cases, he was confident that the Commission and the Council would decide “the right way”. Otherwise, there could be “long-term consequences” for the EU rulebook.

If rules are not applied in a transparent, consistent, and predictable way, “it would make it more difficult to move to a deeper fiscal union”, he insisted.

It is not the first time that the ECB aired its criticism of the European Commission’s efforts to introduce further flexibility in the interpretation of the Stability and Growth Pact.

ECB attacks Commission's easing of fiscal rules

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).

But Coeuré’s comments came against the backdrop of member states’ discussion about how to deal with Spain.

The country was found in breach of the fiscal rules, as Madrid did not take “effective action” to cut the deficit below the 3% of GDP threshold.

The Spanish government recently confirmed that it would not submit corrective measures by 15 October as requested by the EU institutions due to the political stalemate in the country.

As a result, the country faces a fine of 0.5% of its GDP (around €5 billion) and the freeze of €1.1 billion in structural funds.

The issue was discussed during the Eurogroup meeting on 9 September.

If Spain’s acting government fails to adopt the tax increases and cuts, at least “it is important to have a draft budget on the basis of no policy change”, said Commissioner for Economic Affairs Pierre Moscovici, during the same press conference.

The French Commissioner said that Spain’s acting Economic Affairs Minister, Luis de Guindos, “committed himself” to adopt “the necessary fiscal measures” to meet the deficit targets set by the EU.

Spain has to cut its last year’s deficit from 5.1% to 2.2% in 2018, according to the extended calendar given to the country this summer.

“Fed up”

Moscovici also fired back against those who criticised the executive’s verdict on Spain and Portugal.

The European Commission was under fire after German Finance Minister, Wolfgang Schauble called President Jean-Claude Juncker to “pardon” any fine against Madrid or Lisbon, overruling the opinion of its vice-presidents.

Commission split on credibility of rules as Spain and Portugal get ‘pardon’

A strong group of commissioners was in favour on Wednesday (27 July) of imposing at least a symbolic fine on Spain and Portugal for breaching the Stability and Growth Pact, but Jean-Claude Juncker opted for a zero penalty – supported by German Finance Minister Wolfgang Schauble.

“The decision was made without any kind of pressure by any government” but of course “in dialogue” with the governments, he said.  “We acted independently,” Juncker stressed.

“I am fed up with this kind of accusations against the Commission,” the president of the executive complained, as he warned that such criticisms help inspire populism in Europe.

Juncker recalled that, despite the fact that Commission made the proposal, it was the Council who unanimously adopted its recommendation not to fine Spain and Portugal.

“The European Commission is not perfect, but it is an institution like the other institutions”, he told reporters. “We have a rule-based system,” he commented.

Eurogroup President Jeroen Dijsselbloem said he was the “greatest supporter” of the Commission, as he emphasised the need of having an “independent referee”. But while he called on all players to protect that role for the European Commission, he also said that “we have to make sure that we all stick to the rules”.

Dijsselbloem berates Juncker for failing to apply EU pacts

Eurogroup President Jeroen Dijsselbloem has criticised European Commission President Jean-Claude Juncker for saying that the European Commission has given France leeway on fiscal rules “because it is France”.

In 2013, Spain received three extra years to cut its deficit below the mandatory 3% of GDP of the Stability and Growth Pact.

Despite the fact that this was the third time Madrid had been granted leeway since 2009, the deficit reached 5.1% of GDP in 2015, higher than previously announced.

The European Commission's latest forecast predicts that the Spanish deficit will be 3.9% of GDP this year and 3.1% in 2017.

In April, the executive and the ECB concluded that the needed progress on fiscal consolidation in Spain "has come to a halt, with part of the structural adjustment implemented in earlier years being reversed".

Following the elections on 4 October 2015, a three-party coalition led by the Socialist Party came to power in Portugal. The new government failed to submit its draft budget for 2016 by 15 October, as the EU’s fiscal rules said, and sent the draft proposal only on 22 January 2016.

After assessing the first draft, the Commission concluded that the budget was “in clear breach of the Stability and Growth Pact”, and requested more measures.

Portugal has been in the corrective arm of the Stability and Growth Pact since December 2009 and was asked to bring the deficit to below 3% of GDP by 2015. For 2016, the Council recommended that Portugal should make a structural effort of 0.6% of GDP.

Spain and Portugal pledge new measures to avoid EU deficit fines

Both Spain and Portugal have submitted their arguments to the European Commission in a bid to avoid penalties for breaching the fiscal rules, expected to be announced on 27 July.

  • 15 October: deadline for the member states to submit to the European Commission their draft budgets for the following year.
  • Opinions on "no effective action" taken by Spain and Portugal to meet their Stability and Growth Pact targets.
  • Country-specific recommendations on Spain and Portugal.
  • Spring economic forecast.

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