The threat of populism must be a non-issue in decision to fine Portugal and Spain

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

Portugal's Minister for Finance Mario Centeno at the Ecofin Council on 11 July. [European Union]

Stability and Growth Pact rules must be applied to the letter if the eurozone is to keep any kind of credibility. Populism must not be used as an excuse to reward irresponsible budgetary policies, argues Friedrich Heinemann.

Professor Friedrich Heinemann is head of the Corporate Taxation and Public Finance department at the Mannheim Centre for European Economic Research (ZEW).

Ignoring protests from many sides, the Council has followed the Commission recommendation to take the excessive deficit procedures against Portugal and Spain one crucial stage further. The Economic and Financial Affairs Council (Ecofin) has concluded that both countries have failed to take effective action to bring down their deficits. As a consequence, the Commission will now hand out fines. Two types of fines are foreseen: straightforward financial fines and suspensions of cohesion spending. This does not yet mean that fines will eventually have to be paid. The reformed Stability and Growth Pact (SGP) also offers ample room for compromise. But the threat of fines is now more concrete than ever.

Should the Commission and the Council stick to the new rigour and go down the path of imposing real fines, given the current environment of latent economic and acute political crises? The answer to that question is more controversial than ever. While the debate on the SGP and its sanctions is normally about the right macroeconomic policy mix and the appropriate timing of consolidation, it is now also a debate about politics and populism. Critics of the fines argue that this new burden on heavily indebted countries may further alienate voters from Europe and will drive them into the arms of populist movements. This is said to be a particularly real threat in a country like Spain, with its political blockade and a possible further parliamentary election ahead. While this “don’t pave the way for populists” argument may be convincing at first sight, it does not stand up under closer scrutiny.

First, damaging the reputation of the newly-reformed SGP in its first serious credibility test would have an unpredictable impact on the success of populists. In Northern Europe, the effects will be likely to be positive. A complacent view on high deficits in the South which are perceived to increase the bailout pressure on Northern Europe will clearly benefit populist movements in countries like the Netherlands, Austria, Finland or Germany. And if the Brexit referendum has taught one lesson clearly, it is that populists in the North are more Eurosceptical and, hence, pose a larger risk to the survival of the EU than populists in the South.

Second, the fiscal slippage seen in Portugal and Spain is already in itself an expression of populist politicians in power – whatever the names or self-classification of the responsible parties may be. Although solid growth, recovering labour markets and historically low interest rates on government bonds have been favouring government budgets, both countries have taken very conscious and irresponsible political decisions against consolidation. In Spain this largely occurred before the general election, and in Portugal, after. So a lenient SGP interpretation would amount to a reward for populist fiscal policies.

Third, during the crisis, eurozone members agreed on a tougher SGP, and with good reason. The reformed SGP comprehensively takes into account economic circumstances, but not political developments. And this neglect of actual or possible election results is a wise decision. Imagine if key rules of a social market economy like merger controls, independence of the central bank, property rights or tax enforcement were dependent on political developments and election dates. Any such conditionality would undermine the very function and purpose of these rules from the outset, as well as introducing all kinds of perverse incentives. Convincing rules should be depoliticised – and this must also hold for the reformed SGP.

The threatening rise of populism and the next election dates must be fully ignored in any upcoming decisions on fines against Spain and Portugal. Depoliticised fiscal rules are one necessary precondition to limit the damage current and future populists can produce when they are in power.

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