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Stability and Growth Pact IW News 13. September 2016

No further tampering

Jean Claude Juncker might buckle again. Tomorrow, the President of the EU Commission will hold his annual State-of-the-Union speech. He could once again make room for more flexibility of the EU’s fiscal rules – and thereby meet ever louder demands of Southern European countries. However, such a move would further damage the EU’s image in other parts of the Union. The Commission should not yield.

Pressure is rising from Southern Europe to further relax the Stability and Growth Pact (SGP). Last weekend, six Mediterranean countries met in Athens and closed their ranks. They pushed for more fiscal leeway even though most EU members from Northern and Central Europe prefer to adhere to the EU’s fiscal rules.

Italy’s Prime Minister Matteo Renzi was particularly vocal in this respect. Obviously, he intends to hand out campaign goodies to the electorate in view of the constitutional referendum on the reform of the Italian Senate later this year. However, Italy has already benefited from a more flexible interpretation of the SGP to the amount of 0.5 percent of GDP since 2015. Granting ever more leeway is hardly feasible even under the more flexible rules. And it would also be inappropriate.

Nevertheless, Jean Claude Juncker could be inclined to meet the pending demands – despite significant resistance from within the EU Commission. By once again weakening the SGP, he would further endanger the EU’s image in Northern and Central Europe and thus deepen the rifts among member states. Only recently, Juncker put his weight behind the (highly controversial) decision to forgo even symbolic sanctions under the SGP in view of a clear breach of the fiscal rules by Spain and Portugal in 2015. Earlier in 2015, Juncker had the EU Commission interpret the SGP in a more flexible manner.

Particularly, when politicians tend to hand out campaign goodies before elections, the fiscal rules of the EU prove to be indispensable. However, they do so also for economic reasons. For a highly indebted country like Italy – with public debts amounting to 133 percent of GDP in 2015 – it is not sufficient to keep the fiscal deficit just below the 3 percent ceiling. Instead, Italy needs to aim for a structurally balanced budget rather sooner than later. Otherwise, there will be no room for countercyclical fiscal policy to fight the next recession.

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