Thursday, May 31, 2012

Towards fiscal flexibility?

Yesterday, the European Commission showed that the austerity-based approach is more flexible than some might think.

Yesterday was a big day for the European Commission. On one single day, the Commission tried to show that the new, more European, fiscal framework could work, while at the same time keeping the initiative in the race towards a more integrated monetary union.

In its regular assessment of national fiscal plans and reforms, the European Commission showed that the Eurozone’s fiscal framework is not as strict as many often think. The Commission opened the door for Spain to get an additional year for reaching its deficit target, applying the so-called exceptional circumstances. However, the Commission said that two conditions had to be met first: Spain needs to submit a solid plan on how to bring the deficit back to 3% of GDP by 2014 and get excessive spending at the regional level under control. This confirms our broader view on the Eurozone’s fiscal framework, i.e. that under “exceptional circumstances” the consolidation path can be extended, if governments in question show their long-term commitment and determination for sustainable public finances.

Still, the big litmus test for the European Commission and the Eurozone’s fiscal framework is still to come and it will not be about Spain but probably about France. Will exceptional circumstances remain exceptional or just the new paraphrase for leniency. According to the official Commission forecasts, France’s fiscal deficit will be at 4.2% of GDP in 2013, still far off the required 3%. Contrary to other governments, like for example the Dutch government, the French government has so far refrained from additional austerity measures, rather claiming that the Commission’s growth forecasts for France were too pessimistic. Yesterday, the Commission gently reminded France that it had to take “effective action” in order to reach the 3% target next year. The Commission is obviously willing to talk the talk but only time will tell whether it is also willing to walk the walk.

Also yesterday, Commission president Barroso showed that the Commission wants to play an important role in the discussions on how to deepen integration in the monetary union. It is only a thumb sketch, yet, but Barroso presented building blocks to take the Eurozone towards a full economic union. These building blocks could include, among others, a banking union with integrated financial supervision and single deposit guarantee scheme and, as already known, common Eurozone bonds. Even if it would take a lot of time before these elements could actually become reality, the Commission’s proposals go into the right direction and could be an important contribution to the “vision thing” for the Eurozone.

All in all, yesterday did not change the situation in Spain and Greece. However, on a somewhat more positive note, yesterday’s events could have been another small step into the right direction, showing that the austerity approach is more flexible than some might think.

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