Member states limit new flexibility clauses in EU fiscal pact

Valdis Dombrovskis [European Parliament]

EXCLUSIVE / EU member states believe the European Commission is giving too much breathing space to struggling national economies when applying the Stability and Growth Pact, and decided to adopt a more restrictive view of EU fiscal rules, according to an official paper seen by EURACTIV.

EU finance ministers discussed for the first time on Tuesday (8 December) their common position on the proposed flexibility clauses inserted in the Stability and Growth Pact, which limits government deficits and debt to 3% and 60% of GDP respectively.

In order to mobilise public investment and revive ailing growth in Europe, the European Commission proposed a new interpretation of the pact in January, giving countries additional time to balance their public accounts if they implement major structural reforms, increase key investment expenditure, or in the case of severe economic downturn.

The Commission proposal came largely in response to calls by France which has repeatedly denounced Germany’s “obsession” with austerity in the face of the 2008 financial crisis.

>>Read: Montebourg urges alternative to German austerity

A tentative deal — already more restrictive than the Commission’s initial proposal— had been reached on 27 November by national governments’ envoys in the Economic and Financial Committee (EFC) after half a year of closed-door discussions.

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

But Germany reiterated its opposition to greater fiscal flexibility, and led a small group of countries in favour of maintaining strict discipline when applying EU fiscal rules.

Accordingly, EU countries scrapped the most controversial element of the executive’s communication. This includes, for example, a proposal in the so-called “corrective arm” of the Pact, allowing extra time for national governments when reforms are planned but are not yet legally endorsed.

Compatible position

Valdis Dombrovskis, Commission Vice-President for the Euro, played down divergences. He said the member states’ position “is compatible with the spirit and the letter of the executive’s communication”.

The European Commission denied that the EFC’s position limited the use of flexibility clauses. On the contrary, the agreement was reached “with no need to compromise with respect to the letter of the communication”, EU officials claimed.

However, the EFC’s position did not mention the possibility of granting additional time ex ante to member states in the corrective arm. Moreover, it stressed that “a plan announcing upcoming reforms as a simple manifestation of political intentions or of wishes would not fulfil the requirements” to grant extra time.

In order to make the flexibility included in the SGP more operational, the Commission said last January that structural reforms will be taken into account ex ante, as long as a national government presents “a dedicated structural reform plan…containing detailed and verifiable information as well as credible timelines for the implementation and delivery”.

The executive argued that its communication just recalled what is included in the EU’s rulebook, as structural reforms are a “relevant factor” when establishing a deadline for an excessive deficit procedure or when extending a deadline to balance the public accounts, as was the case for France this year.

However, the Council legal services issued an opinion last April warning that the European Commission went too far in interpreting the treaty. Following its steps, the European Central Bank also stated that the use of this clause for member states in the corrective arm could be “counterproductive”.

>>Read: ECB attacks Commission’s easing of fiscal rules

Cap on flexibility

Member states also decided to impose clear limits on flexibility clauses inserted in the “preventive arm” of the Stability and Growth Pact. By the numbers, this means temporary cumulative deviation from the targets granted under the structural reform clause and the investment clause must not exceed 0,75% of GDP.

The Commission believes that the binding power of this cap is mostly theoretical, as the average national co-financing in case of investment does not exceed 0.4% of GDP.

The Council’s interpretation also stated that the flexibility clauses can be used only once each of them (investment clause and structural reform clause) during the adjustment period to balance the public account toward the medium term objective. This limit was not included in the executive’s document.

Germany not fully satisfied

Another bone of contention during the negotiations was the use of the investment clause. Germany was against putting on equal footing the structural reform clause and the investment clause, as only the former is anchored in the Treaty.

For the EU executive, both are at the same level since the investment clause is a “specific application” of the structural reform clause.

EU sources said German Finance Minister, Wolfgang Schäuble took the floor during the Ecofin Council to express its opposition to this. However, Berlin did not block the agreement reached at the EFC as it broadly agrees with the member states’ common position.

In return, Berlin obtained a more demanding use of the investment clause. When requesting the application of this clause, national governments should include “detailed information on the contribution of the investment projects to the implementation of structural reforms and their equivalence to a structural reform, including the positive, direct and verifiable long-term budgetary effect of the expenditure covered by the temporary deviation”.

Moreover, the national governments will be requested to provide an “independent evaluation” of this information, including on the estimated long-term impact on the budgetary position.

A national diplomat commented that this latest interpretation of EU fiscal rules was needed to introduce more “clarity and transparency” to the European Commission’s communication. Otherwise, the application of the SGP would have been a “sieve”.

The EU Finance ministers will have to formally adopt the EFC’s common position and to adapt the Council’s code of conduct to interpret the Stability and Growth Pact according to the agreement. EU sources expected this process to be concluded in time for its application next year for the current economic governance cycle.

The interpretative communication on the Stability and Growth Pact, adopted by the College of Commissioners on 13 January,  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.


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