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Financial Sanctions IW News 11. July 2016

EU must take gloves off

For the first time in the history of the Stability and Growth Pact, the EU could impose sanctions for excessive government deficits. Targeted by sanctions would be Spain and Portugal. And rightly so, because compared to France and Italy, the budget deficits of the Iberians are significantly more severe. This does not allow tinkering with the fiscal rules anymore.

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The much criticised Stability and Growth Pact (SGP) could finally show its teeth. The size of government deficits in Spain and Portugal is no longer tolerable for the other euro countries – and the European Commission shares this assessment. This is remarkable, because recently the EU Commission was widely criticised because it had postponed the decision to recommend stepping up the deficit procedures in view of the Spanish elections.

If the EU finance ministers adopt the Commission’s recommendation, the Commission has to propose sanctions within 20 days. Then, EU finance ministers can only prevent this with a qualified majority against the sanction within 10 days. This reversed majority rule has been introduced with the recent reforms of the SGP in 2011. Before, a qualified majority for (instead of against) sanctions was needed.

This shows: The SGP and the European rules might often be interpreted rather generously in Brussels, but the expansion of the rules also has its clear limits. Therefore, it was important to tighten the SGP rules in order to counteract a weakening of budgetary discipline. The European rules clearly contribute to improving the economic policies of member states. This is all too often forgotten in the current course of EU scepticism.

Spain and Portugal may criticize that an example should be made of them that would have been justified already in France’s and Italy’s case. From that argument, it could be easily deduced that Brussels should waive sanctions again. It is true that France, and especially Italy, have to reduce their fiscal deficits somewhat faster in the coming years than provided by their recently tabled stability programs. But a comparative look at the government deficits shows very clearly that the Iberians have violated the SGP to a much larger degree than France and Italy.

Although France also breaks the three-percent deficit threshold by a small margin, it has considerably reduced its structural deficit in recent years. Italy recently allowed for a slight increase in the structural deficit, but its budget deficit was 2.6 percent of GDP in 2015 and thus somewhat below the three-percent mark. In comparison, Spain and Portugal have budget deficits of much more than four percent of GDP and - which is particularly problematic – increased their structural deficit significantly in the past year.

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