Beware the EU dog that doesn’t bark

In the wake of non-enforcement of fines for failing to hit fiscal deficit targets Daniel Gros discovers that EU member states prioritise domestic political imperatives over common rules

Sometimes the most important thing that happens is what doesn’t happen — or, to paraphrase Sherlock Holmes, it’s the dog that doesn’t bark in the night. The lack of response to the European Commission’s non-enforcement in Spain and Portugal of the terms of the Stability and Growth Pact (SGP) is one of those times.

According to SGP rules, the Commission should have proposed a fine to be levied on Spain and Portugal for overshooting their fiscal deficit targets by a wide margin. The fine would have been largely symbolic, but the Commission seems to have decided that the symbolism wasn’t worth it.

And it was not only the Commission that chose not to bark; the rest of Europe remained silent as well. Not even Germany, the European Union’s leading austerity watchdog, perked up. In fact, there have been reports that German finance minister Wolfgang Schäuble lobbied several commissioners not to impose fines on Spain or Portugal. The German financial press, which often criticises the European Commission for being too lax, barely registered the decision.

What explains the silence? There is precedent for fiscal leniency in the EU. In 2003, all three large eurozone countries (France, Germany, and Italy) were running deficits in excess of 3% of GDP, the upper limit established by the SGP. Toward the end of that year, it was clear that France and Germany (then with record-high unemployment) were not fulfilling their deficit-reduction commitments.

But, unlike today, the Commission did bark (even if it could not really bite). It proposed ratcheting up the SGP’s so-called excessive deficit procedure. The proposal did not entail any fines; rather, it focused on the stage before fines would be considered. Nonetheless, EU finance ministers strenuously opposed it, largely for political reasons.

The clash occupied the front pages of newspapers all over Europe, especially in Germany, where the press, like the political opposition, was eager to chastise Chancellor Gerhard Schröder’s government for its failure to uphold fiscal rectitude. There were heated debates on the fiscal rules, and the Commission’s role in enforcing them. In short, everyone was howling.

Despite the resistance, the Commission decided to plough ahead and censure Germany and France. With that decision, it sent a clear message that it took seriously its responsibility to administer the EU treaties — so seriously, in fact, that it would enforce rules with which it did not necessarily agree. Indeed, the Commission’s then-president, Romano Prodi, had already harshly criticised the SGP’s rigidity. Ultimately, however, political interests won the day, and the EU finance ministers voted down the proposal.

The ministers subsequently moved to reform the SGP, shifting the focus from headline deficits to a measure of the fiscal position that takes into account the state of the economy. The Commission accepted the reform, and has since made additional changes, each time proudly declaring that the SGP is more “flexible” and “intelligent” than ever.

Today, Spain and Portugal are not adhering even to the new flexible rules. Yet the current Commission, led by president Jean-Claude Juncker, was divided on whether to enforce them, with some commissioners favouring leniency. Schäuble’s intervention, it seems, settled the matter. Clearly, when it comes to allowing political considerations to affect enforcement of the rules, not much has changed.

And, in fact, this time around, the Commission had more power to override resistance from finance ministers. After the 2008 economic crisis, Europe introduced a “reverse majority rule,” under which any Commission proposal to impose a fine is final, unless EU finance ministers can muster a two-thirds majority against it. And herein lies a key difference between today and 2003: the Commission’s commitment to enforcing SGP rules has waned.

The relative silence of the public and the media drive the point home. Support for the fiscal rules has faded. Perhaps, with a surge in terrorist attacks, particularly in Germany and France, citizens and leaders are too preoccupied with security issues. The UK’s impending Brexit is also consuming attention. And continuing high employment in many countries may seem more urgent than reducing deficits.

But the decline in support for European fiscal rules carries serious risks. If the most concrete elements of the eurozone’s governance framework are not applied, what will compel member states to undertake reforms and stabilise their debt levels? Vague exhortations will not work. It seems the crisis, and the untenably large risk premia for highly indebted governments that followed, has already been forgotten.

Officially, the Commission is still working to realise the blueprint for a “genuine” Economic and Monetary Union. But in the wake of the Commission’s decision not to enforce the SGP, this effort has become meaningless. It is now clearer than ever that EU member states prioritise domestic political imperatives over common rules — and Europe’s common good.

Daniel Gros is director of the Center for European Policy Studies.


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