Wednesday, September 29, 2010

Now or never

The European Commission today presented its proposals to beef up fiscal surveillance in Europe. As expected, the proposals hinge on three pillars: a prominent role on debt, stricter sanctions and a new focus on competitiveness, trying to improve both the preventive and the corrective arm of the current Stability and Growth Pact.

As regards the preventive part, annual expenditure growth should not exceed medium-term GDP growth anymore. Countries not sticking to this rule could be penalised with a fine of 0.2% of GDP. Decisions on this fine should be taken with a “reverse voting” mechanism. This means that a sanction will be automatic but could be turned down by the Council (European governments). In the current setting, the Council always has to approve verdicts from the Commission.

As regards the corrective arm, more focus should be given to debt. The Commission proposes to make sanctions possible against countries where government debt exceeds 60% of GDP and where at the same time the debt ratio is not improving over a three-year period. The Stability and Growth Pact already foresaw the option of an “excessive debt procedure” but this procedure had never been made operational. In addition, sanctions should not come at the end of the ride as it is the case in the current setting but immediately when an excessive deficit or debt procedure is started. Again, the procedure of “reverse voting” should be applied.

Finally, the Commission came also up with a framework to tackle macroeconomic balances. Parallel to the procedure on deficits and debt, a new excessive imbalance procedure should be introduced. Based on a set of indicators, the Commission and the Council should identify imbalances and address them, eventually even with sanctions.
All in all, the Commission’s proposals are a bold and balanced step towards a better fiscal framework. Not all proposals will see the light of legal action or will get watered down in some horse trading with national governments. In particular the excessive imbalance procedure rather looks like an intellectual hobby horse but will be hard to implement. Moreover, whether sanctions of 0.2% of GDP really scare off governments from running deficits is rather unlikely. (Temporarily) taking away voting rights would probably have a bigger impact. On a more positive note, the focus on debt will be essential in avoiding a second sovereign debt crisis in the future. Moreover, the idea of reverse voting is charming as it cleverly turns around the burden of proof.

With today’s proposals the Commission tries to take the lead in the debate, putting enormous pressure on the Council Working Group under Van Rompuy. The proposals underline the urgency and the fact that the window of opportunity to sharpen the current framework might me small. The Commission proposals are probably the best possible upgrade of the fiscal framework without entering a fiscal union. More is hardly possible. Now national governments have to react. It is now or never.

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