Financial stability of the EU
Adelina Marini, April 12, 2009
The European Commission presented today its comments on the stability and convergence reports of 17 member states.
The comments after the College of Commissioners were expected with great interest because of the financial crisis and because of the expectations for the development of the European economy. But from the presented data it becomes clear that the saving of the drowning people is in their own hands as a Bulgarian saying goes.
Regarding Bulgaria commissioner Joaqin Almunia recommended that the Bulgarian government should continue to guarantee a budgetary surplus of 3 % of GDP, to be careful with the public expenditure by guaranteeing their effectiveness, to increase the productivity of labour and not to increase salaries. Almunia did not make a connection between the increase of salaries and the upcoming parliamentary elections in Bulgaria but his message was pretty clear: an increase of salaries without an increase of productivity and without reform of labour and production markets would be unwise. Almunia also didn’t comment on the anti crisis measures of the Bulgarian government but he stressed that Bulgaria should be very heeding regarding the stability of public finances because of the nervousness of the markets.
The comments on the convergence programmes of member states are made according to the rules of the Stability and Growth Pact which is in fact the framework for implementation of some sort of common financial policy of the European Union. The document is trying to reflect the big discrepancies between the economies of the member states. That is why the Pact does make a difference between countries that are members of the Eurozone and those that are outside. In this regard the recommendations of the European Commission are nothing more than recommendations for Bulgaria because they are not obligatory for a non Eurozone member. This is not the case for Britain, France, Spain, Greece, Latvia and some other countries against which the Commission is starting procedures for excessive budget deficit. But Almunia stressed that during recession period there will not be sanctions but the requirements of the Pact must be met.
After the presentation of the visions of the European Commission for the public finances in Europe, especially on national level, it became clear that a reform of the Stability and Growth Pact is desperately needed exactly because of the unprecedented financial crisis and because of the deepening of the economic discrepancies not only among the member states of the EU but especially in the Eurozone and this happening 10 years after the creation of the Single European Currency.
Where is the problem?
In the very high requirements of the Stability and Growth Pact and namely the criteria for stability of the financial system which are taken on the basis of the best performing country in the Zone which for many years is Germany. These very strict requirements in an area of very different in type and development economies are the reason for its growing instability.
Actually the issued was raised yet in October by the Centre for European Reform. In his publication Simon Tilford says that with the introduction of the euro, the competitiveness of member states differs significantly especially because of the rigid restriction of salaries increases in Germany and the Netherlands and the very low productivity of countries like Italy and Spain. In result, says Simon Tilford, there are huge trade deficits in Spain, Greece and Ireland, much less in France and Italy. But in the same time in Germany, the Netherlands and Austria there are huge budgetary surpluses. In most countries there is depressing growth which can often be considered as a statistical error. Tilford gives examples with Italy, Portugal and to some extent Spain. That is exactly why the criterion of the Stability and Growth Pact must be changed.
History of the Pact
The agreement for budgetary discipline of the European Union as the Pact is also known was signed in 1996 in Dublin. The aim of the document is to guarantee complete financial stability and prudence of the future Economic and Monetary Union. Since then Germany has been the leading force insisting for more rigid rules. The restrictions now are keeping the budget deficit below 3 % of GDP because otherwise sanctions would follow. France and Spain were sanctioned already for exceeding budget deficit but they never paid their fines. Beside this governments should restrain their debts to 60 % of GDP. In 2005 the European Council voted changes in the Stability and Growth Pact but the two above mentioned remain. The sanctions were changed. The countries that report budget deficit around and above 3 % will be able to explain it with relevant reasons. Exactly this clause is set in motion now because the European Commission started excessive budget deficit procedure against 6 countries. But if the budget deficit is one of the pillars of the financial stability in the Eurozone then this pillar is in danger in global financial and economic crisis. Besides, the rules of the Eurozone have not foreseen the need for help for countries in trouble maybe because the implementation of strict financial measures requires political decisions and politics is no longer common.
The worries that protectionism is reviving are also not accidental because some member states are inclined to violate rules, negotiated with years and a lot of compromise with the only aim of unity. That is why it is so important urgent measures to be taken for the reform of criterion, established in the end of last century. This century obviously holds different requirements and it is necessary the EU and the Eurozone to start thinking more quickly so as to manage to catch up with global changes and also to be able to respond to the challenges. Otherwise there’s a danger of disintegration which no one has ever expected and whose consequences no one can foresee.