It is Groundhog Day in the eurozone. Some governments are displaying the same artful disregard for budget rules that marked their behaviour in the euro’s first 10 years. The question is whether this fiscal mischief is dangerous. Does it make the eurozone vulnerable to another near-death experience?
Seen from Germany, fiscal recklessness was the original sin of eurozone governments and the root cause of Europe’s post-2008 debt crisis. It follows that budgetary rectitude is the remedy. Hence the EU’s 2012 fiscal compact, with its stipulation that budgets should be, except under specific circumstances, balanced or in surplus.
If the eurozone crisis had a multitude of causes, of which fiscal irresponsibility was not the most important (except in Greece), it will seem less worrying that some governments are reverting to old habits.
However, even if a new round of rule-bending will not kill the eurozone, it should not be dismissed as irrelevant.
Governments that observe common rules will never trust those that evade them. The real danger, then, is that an enduring mistrust over rule-bending will prevent the eurozone from achieving the closer banking, fiscal and economic union required to survive another serious crisis.
Governments that observe common rules will never trust those that evade them. The real danger, then, is that an enduring mistrust over rule-bending will prevent the eurozone from achieving the closer banking, fiscal and economic union required to survive another serious crisis
Consider the draft 2016 budgets that eurozone governments have just sent to the European Commission. The plans of France, Italy and Spain, which account for almost half the eurozone’s economic output, make it difficult to avoid the conclusion that all three governments pretend to observe the rules while skipping round them in practice. So, once again, Germany and its northern European allies grumble about fiscal laxity and a cavalier approach to rules in southern Europe. Southern Europeans raise their eyebrows in despair at the stubborn inflexibility of the northerners. Groundhog Day, indeed.
What does the commission think? In January it published “Making the Best Use of the Flexibility Within the Existing Rules of the Stability and Growth Pact”. This pointed out that the EU’s fiscal rules are not so strict as to suppress all budgetary flexibility — but that rules are rules and governments ought to adhere to them. After the crisis, the commission wrote, “the existence and respect of the rules have been essential to restore trust and confidence”.
If respect for the rules is ‘essential’, the eurozone is back in trouble — because France, Italy and Spain are making their disdain for the rules obvious. France aims to cut its structural budget deficit in 2016 by 0.3 percentage points of gross domestic product less than it promised seven months ago. This might seem trivial, were it not that France has a long record of slipping its fiscal leash. In March, Paris secured a reprieve from EU finance ministers and won two more years to bring its budget deficit under the EU ceiling of 3pc of GDP. Italy wants to go further and loosen its budget strings. Instead of reducing its structural deficit by 0.5 percentage points, it wants to raise it by 0.4 percentage points. Spain’s 2016 budget foresees a higher structural deficit, not a smaller one as outlined under EU rules.
What do all three governments have in common? Spain will hold legislative elections in December, France holds presidential and parliamentary elections in 2017 and Italy will probably also elect a new legislature in 2017.
Naturally, the incumbents — Mariano Rajoy in Spain, François Hollande and Manuel Valls in France and Matteo Renzi in Italy — want to boost their chances of re-election. But let us be honest — it is doubtful they believed in the new fiscal rules in the first place. If, however, they imagine this is the way to make Germany sacrifice more sovereignty for the sake of an integrated eurozone, they could not be more wrong.
Published in Dawn, Business & Finance weekly, November 9th, 2015
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