Eurozone fiscal rules and zero percent fines

by Robert Sierra - 08 August 2016

Early in the 2000s, when Germany, France and Italy were running excessive budget deficits the European Commission proposed that fines of up to 0.2% of GDP would be applied to any member state that failed to bring its fiscal deficit below the 3% of GDP benchmark. Any decision to impose a penalty by the Commission would be final unless Finance Ministers were able to garner a two thirds majority against such a proposal.

Hence it was surprising that the Commission decided not to impose financial sanctions on Portugal and Spain for breach of the pact. Spain’s fine would have amounted to €2bn for running a deficit of 4.6% of GDP but instead it has been granted two extra years to reduce its deficit while Portugal will now have to achieve a 2.5% deficit by the end of 2016, one year later than its previous goal. The Commission will still impose a symbolic zero per cent of GDP fine.

This is not the first time that the Stability Pact has been broken. In 2003, Germany, France and Italy were running deficits of 4.1%, 3.9% and 3.4% of GDP respectively with little apparent commitment by the largest two countries to implement the cuts they had promised. Germany, who imposed the pact as a condition for giving up the Mark, was battling record unemployment at the time but the Commission was nevertheless determined to push on with the fine. France and Germany won backing for their flexible interpretation of the pact after a stormy exchange with smaller states. In the formal show of hands, only Holland, Austria, Finland and (ironically in view of last month’s decision) Spain voted to uphold treaty law (to impose a fine) while Belgium, Sweden, Denmark and Greece voted for a lesser condemnation.

In the event, the Commission’s proposal for a fine was voted down in Ecofin, but not before the Commission had forcefully made the point that it took its responsibility seriously as guardian of the treaties and their rules. But this time was different. The Commission was already riven by internal disagreement on the issue, with some Commissioners preferring to take a softer line and motivated essentially by political considerations in Spain. The Commission also admitted that the decision was partly motivated by waning confidence in the EU’s institution in the continent; the Brexit vote likely put that sentiment into perspective. Moreover, the personal intervention by Germany’s Finance Minister, Wolfgang Schäuble, ensured that Spain and Portugal were able to escape fiscal punishment. Ironically, it was also Schäuble who only two months ago argued for the Commission to hand over its role as fiscal watchdog to a more independent body because of the supposed politicisation of Brussels’ economic decision making.

The key takeaway is clear: rules can be bent when it is politically convenient. What this implies is that the economic governance structure set up by the Commission has effectively become meaningless. No member state can now reasonably be asked to undertake any economic measure that the national government deems to go against its prevailing political interests.

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