When rules are there to be bro­ken

Financial Mirror (Cyprus) - - FRONT PAGE -

It has be­come an ar­ti­cle of faith for Europe-watch­ers that the one thing hold­ing to­gether the sin­gle cur­rency area is super easy mone­tary pol­icy. Yet, in light of Brus­sels deficit polic­ing bu­reau­cracy hav­ing re­cently been re­vealed as a tooth­less tiger, ex­pan­sion­ary fis­cal pol­icy can per­haps be added to the list. It is hardly news that Europe is back­track­ing from Ger­man-dic­tated aus­ter­ity, but for the first time of­fi­cials are openly ad­mit­ting that their “ex­ces­sive deficit” rules are there to be bro­ken. Italy, Spain and Por­tu­gal will all miss fis­cal tar­gets this year, and while bad boy Greece re­mains locked in a debtors’ prison, this re­lax­ation seems a clear re­sponse to the cur­rent pop­ulist po­lit­i­cal up­surge.

Specif­i­cally, the diminu­tion of Berlin’s po­lit­i­cal author­ity over the last year has pro­vided cover for breaches of fis­cal rules agreed to back in 2011. The re­sult for Italy, Spain and Por­tu­gal is that fis­cal pol­icy should be broadly neu­tral this year, while an en­force­ment of sched­uled deficit tar­gets would have im­posed a fis­cal drag. The di­rec­tion of travel points to drag even­tu­ally turn­ing into a tail wind. As such, the euro­zone is evolv­ing a more flex­i­ble set of fis­cal rules more akin to the old growth and sta­bil­ity pact, which saw both Ger­many and France breach their obli­ga­tions in the early 2000s. Con­sider the fol­low­ing slip­page.

- Spain’s deficit blew out to 5.1% of GDP last year com­pared to a tar­get of 4.2% in 2015 and 2.8% in 2016. Now the plan is for a deficit of 3.7% of GDP in 2016 and a deficit of 2.5% in 2017.

- Por­tu­gal was due to record a general gov­ern­ment deficit of 2.7% of GDP in 2015. In fact the deficit amounted to 4.4% of GDP, and Brus­sels is now call­ing for it to fall to 2.3% in 2016.

- Italy’s deficit is be­low 3% of GDP, but it faces scru­tiny be­cause of the need to trim a pub­lic debt that has risen to 133% of GDP. This month it was granted “un­prece­dented flex­i­bil­ity” in set­ting its bud­get, with dis­cre­tion worth 0.85% of GDP. The deal re­quires Italy to sub­mit a bud­get agree­able to Brus­sels by Novem­ber and was os­ten­si­bly granted due to Rome push­ing through a se­ries of struc­tural re­forms.

In re­al­ity, th­ese agree­ments re­flect less some wily tech­no­cratic so­lu­tion than a crude bar­gain­ing process be­tween na­tional cap­i­tals and Brus­sels. In Italy, re­formistin­clined Prime Min­is­ter Mat­teo Renzi faces an au­tumn ref­er­en­dum to gain con­sent for con­sti­tu­tional re­form that aims to make gov­ern­ments stronger and so al­low the pas­sage of con­tro­ver­sial leg­is­la­tion. Th­ese changes face fierce op­po­si­tion and Renzi has ex­tracted flex­i­bil­ity from Brus­sels on the ba­sis of him be­ing the best hope to re­form Italy be­fore it slides on a tra­jec­tory out of the euro­zone. Sim­i­lar logic ap­plies to Spain, which has a na­tional elec­tion on June 26, that Brus­sels will des­per­ately hope re­turns cen­trist par­ties. Por­tu­gal’s new so­cial­ist gov­ern­ment has cap­i­talised on its man­date to back­track on pre­vi­ous bud­get com­mit­ments with Brus­sels and win more flex­i­bil­ity.

No doubt, Brus­sels will seek to re-im­pose bud­getary dis­ci­pline once the 2016 elec­toral cal­en­dar has cleared. How­ever, our point is that the ge­nie is out of the bot­tle and it will be hard to re-im­pose rules-based bud­get­ing so long as Southern Europe faces acute de­fla­tion­ary pres­sure as fis­cal tight­en­ing will make mat­ters worse.

More­over, the po­lit­i­cal stakes are set to rise with next year’s pres­i­den­tial elec­tion in France likely to see the en­force­ment of fis­cal rules slip fur­ther. Such a trend should sup­port growth in the short term, but it does un­der­mine any no­tion of the euro­zone con­verg­ing to­wards a shared fu­ture, some­thing that will raise tem­per­a­tures in Berlin. Rather, this looks like an­other ex­am­ple of cen­trifu­gal forces gath­er­ing strength.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.