Europe's bud­get rules need en­force­ment

The Pak Banker - - FRONT PAGE -

As it does each year, the Euro­pean Com­mis­sion is ex­am­in­ing the bud­gets of euro- zone mem­ber states to see if they com­ply with the bloc's fis­cal rules. This time the re­cent slow growth of the Euro­pean econ­omy com­pli­cates this work, which sug­gests that Brus­sels should not be overly strict. The Euro­pean Com­mis­sion needs to sanc­tion se­ri­ous vi­o­la­tions, but it can af­ford to be le­nient with bor­der­line cases. The Euro­pean Com­mis­sion's cur­rent fore­casts say that out­put in the euro area will ex­pand by around 2 per­cent this year and next. But the most re­cent signs are less en­cour­ag­ing. The EU growth is fal­ter­ing. The up­surge in US pro­tec­tion­ism and trade war threat­ens Europe's ex­porters. And morevoer the height­ened volatil­ity in fi­nan­cial mar­kets is un­der­min­ing con­fi­dence.

The Euro­pean Cen­tral Bank has rightly promised to end its bond- buy­ing pro­gram at the end of this year, which puts more bur­den of main­tain­ing macroe­co­nomic sta­bil­ity on fis­cal pol­icy. No ques­tion, the euro area should take the rules se­ri­ously and use the re­cov­ery to re­duce pub­lic debt - but this doesn't mean turn­ing a blind eye to the risk of a re­newed slow­down.

As part of its re­view, the com­mis­sion has asked for fur­ther clar­i­fi­ca­tion of the bud­get plans sub­mit­ted by Bel­gium, France, Por­tu­gal, Slove­nia and Spain. In one case - Italy - it took the un­prece­dented step of telling the gov­ern­ment to sub­mit a new plan. This was right: Rome's first at­tempt didn't so much break the rules as repu­di­ate them, and Italy's enor­mous pub­lic debt leaves no room for er­ror. In­vestors are alarmed about the plans, and there's a dan­ger that the mood will spread, putting other coun­tries at risk.

Italy, though, is an ex­treme case. France's bud­get deficit will rise a lit­tle next year to 2.8 per­cent of out­put, but that's be­cause of a tem­po­rary fall in rev­enues caused by a change to the tax sys­tem; the un­der­ly­ing cycli­cally ad­justed bud­get deficit will fall re­gard­less ( al­beit by a bit less than the com­mis­sion had re­quired). The same is true of the other coun­tries un­der ex­am­i­na­tion ( ex­cept for Slove­nia, which hasn't yet sub­mit­ted a full bud­get for 2019).

The Euro­pean Com­mis­sion ought to main­tain the cred­i­bil­ity of its fis­cal rules by pun­ish­ing se­ri­ous vi­o­la­tions. But crack­ing down on unim­por­tant de­vi­a­tions, es­pe­cially if the Euro­pean econ­omy turns out to be de­cel­er­at­ing, would be bad eco­nomics and worse pol­i­tics. If the rules are to com­mand sup­port, they need to be en­forced - ju­di­ciously.

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