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EU’s Broken Budget Rules Need Change

EU’s Broken Budget Rules Need ChangeEU’s Broken Budget Rules Need Change

Rules are made to be broken—and that’s official. Spain and Portugal have just escaped punishment for breaking the European Union’s budget-deficit limits.

EU governments have drawn a final line under months of squabbling over the excessive budget deficits of Spain and Portugal, after they agreed to give the two countries additional time to hit their targets and to waive any fines.

In the EU, such lapses without consequences are not exactly uncommon. In the case of the budget rules, that’s a good thing, because the rules are widely acknowledged to be no good. But here’s a radical thought: Bad rules that nobody has any intention of enforcing would be better scrapped, Bloomberg opined.

The debt-and-deficits rules, part of the 1997 Maastricht Treaty, were designed to assure Germany and other fiscally conservative eurozone members that less disciplined governments wouldn’t get a free ride. They’ve failed—and in two distinct ways. Too much wasteful spending remains a problem in many countries. And the pressure to cut, such as it was, has fallen too heavily on public investment.

Spain’s budget deficit was 5.1% of gross domestic product last year and Portugal’s was 4.4%—both in excess of agreed-upon targets. Breaching the EU’s deficit targets without permission is supposed to be met with a fine of up to 0.2% of GDP. But the targets, based on a ceiling of 3% under normal circumstances, are too low. Under current conditions, it would be a mistake for some countries to be on the right side of that number. Europe has been suffering from a serious shortfall of demand, and fiscal stimulus was the right response.

Spain, moreover, has been a bold reformer in other ways. Its conservative government pushed through tax and labor-market reforms that helped to restore growth, now running at more than 3%. Its government deserves to be commended, not punished. Portugal is in worse shape, to be sure, with its high public debt, sluggish growth and dangerously fragile banks. Its government does need to undertake a fiscal correction—but fining it for failing to do so would hardly have made that politically challenging task any easier. Again, therefore, Europe was right to withhold punishment.

Europe’s leaders need to rethink. They call the budget rules the “cornerstone of the EU’s economic governance”. Rules too dumb to be enforced should be mended or scrapped.

Financialtribune.com