Cause and Effect in European Politics and Law

Brussels sends the 27 EU member states on a budget exam

Ralitsa Kovacheva, May 15, 2010

As promised, the European Commission showed its teeth and warned that it wouldn’t allow a repetition of the Greek story - not only in the euro zone, but in the entire European Union. As expected, the Commission`s proposal for strengthening financial discipline and supervision and for enhancing economic policy coordination between the member states, provides for more effective prevention, on the one hand and for more severe sanctions, on the other. Especially for the 16 euro zone countries. If approved by the national governments, the initiative would be the most serious progress in the economic governance of the euro zone since the euro was introduced in 1999, the Financial Times commented.

The most disputed proposal concerning prevention is related to the introduction of a European economic semester, whose main idea is to force member states to present for mutual surveillance to the Council in the beginning of each year their national Convergence programmes, including their draft budgets and Reform programmes. The purpose is achieving an early coordination and a possibility to eliminate any risks for the Community by adjusting contradictions and emerging imbalances in national budgetary policies.

“In full respect of the prerogatives of national parliaments, the early peer-review would provide guidance for the preparation of the national budgets in the following year. In case of obvious inadequacies in the budget plans for the following year, a revision of the plans could be recommended.” According to the Commission, a synchronized evaluation and coordination of fiscal and structural policies at a European level will help Member States achieve common objectives and tackle common challenges more effectively than at present. The first European economic semester will start yet in the beginning of 2011.

Only a few hours after the release of Commission's Communication, Swedish Prime Minister Fredrik Reinfeldt said it was "strange" that countries with sound budgets should be scrutinized by their EU partners. According to him the peer review mechanism "could perhaps be possible for [countries] with a budget policy that goes against the [EU] stability and growth pact."

Such a reaction is understandable and it will hardly remain isolated against the background of common wrath, evoked by the Greek crisis. More and more Europeans are dissatisfied with the necessity their states to participate in rescue efforts of otherMember States whose problems stem from bad governance of public money, including European funds.

Another “Greece lesson” has been reflected in Commission's intention to strengthen Eurostat's mandate to audit national statistics’ in order to ensure true and accurate data. “It is important to bring this proposal swiftly into force as this will improve the quality of reporting on public finances”, Communication says.

With regard to the other element - correction of the problems, the Commission stipulates that the Excessive Deficit Procedure EDP should continue to play the main role, but the focus on public debts must be strengthened, instead of only the deficits. Currently the public debt of Greece and Italy exceed 100% of their GDP, and the average ratio in the euro zone is expected to grow to 88.5%, which is much above the limit of 60% set in the Stability and Growth Pact. According to the Commission, changes in secondary legislation are required in order to “speeding up the procedures, in particular with regard to Member States in repeated breach of the Pact”, because at the moment the EDP comes into play too late.

“Member States with debt ratios in excess of 60% of GDP should become subject to the EDP if the decline of debt in a given preceding period falls short of an appropriate benchmark. Specifically, the Commission and the Council would need to assess whether the budget deficit is consistent with a continuous and substantial decline in public debt.”

According to the Commission, the sanctions for countries that violate financial discipline must be strengthened. Currently, the suspension of the Cohesion funds is only considered at a later stage of the EDP. Cohesion policy should have a clearer role in supporting Member States' actions to address structural weaknesses and competitiveness challenges, the Communication says.

“Conditionality could be enhanced and Member States could be asked to redirect funds to improve the quality of public finances, once the existence of an excessive deficit is established. The forthcoming 5th Cohesion Report will present proposals in this respect, particularly with a view to strengthening institutional capacity and efficiency of public administrations.”

In order to achieve better cohesion, especially in the euro zone, the Communication pays special attention to the ways of limiting macroeconomic imbalances and promoting competitiveness. For all Member States, macroeconomic imbalances will be examined within the "Europe 2020" framework. Especially for the euro area, it is proposed the peer review of macroeconomic imbalances to be upgraded, now carried out by the Eurogroup, into a structured surveillance framework for euro area Member States, which, as with regard to the fiscal measures, will meet more stringent requirements than those for EU27.

The surveillance will include a scoreboard with certain indicators in order to ensure early detection of serious imbalances and a formulation of the recommendations for preventive or corrective measures where needed. Policy recommendations could address both the revenue and expenditure side of fiscal policy and could also address the functioning of labour, product and services markets in line with the broad economic policy and employment guidelines

The Commission intends to make a proposal for a permanent crisis resolution mechanism in the medium-to-long term. In the next three years the European stabilisation mechanism will be in force as decided by the Ecofin on May 9th. The permanent crisis mechanism should come into force after its expiry.

Against the background of Commission's firm intentions to address “loose” financial discipline in the EU, some important news on Bulgaria has come up to light. The first is that in the end of the day an Excessive Deficit Procedure will be initiated for Bulgaria, because, according to the Commission, a fiscal deficit of 3.9% cannot be considered close to the reference value of 3% and in this regard the deficit criterion in the Treaty is not met.

As with the evaluation of Bulgaria's Convergence programme, this time the Commission warned that the expectations in the government's planned fiscal policy are too optimistic. What is worse is that, according to Brussels, its own forecast the deficit in Bulgaria to be below 3% of GDP this year, is facing "significant uncertainties".

A week ago, Deputy Prime Minister and Minister of Finance Simeon Dyankov promised, although the budget update and the new plans for spending had not been announced yet, that the deficit would remain within EU's requirements. Prime Minister Boyko Borissov, however, said in an interview for the bTV, that the budgetary deficit for 2010 wouldn’t be more than 4.5%. A commitment, which Brussels would hardly like.

Excessive Deficit Procedures have been started also for Cyprus, Denmark and Finland. The procedure provides for the Council to make recommendations to countries violating the Stability Pact, which must be met within certain deadlines. In the first stage recommendations are not publicly disclosed, this happens only after a state fails to take appropriate corrective actions.

The second news is that according to the Convergence Report of the Commission for 2010, Bulgaria meets only the debt criterion for the euro area. Since the beginning of the year, inflation is rising and the economy has contracted by 4% compared to the corresponding period of the previous year, the latest figures of the National Institute of Statistics show for the first quarter of the year.

The update of Budget 2010 can also be referred to in the category "significant uncertainties", because a major increase in spending at the expense of a release of funds from the fiscal reserve is planned. Against this background, the statement of Finance Minister Simeon Dyankov, that the postponement of Bulgaria's entry into a the ERMII will be only by six months, sounds more than optimistic.

However, Estonia earned its right to join the European single currency on January 1, 2011. The country has been a member of the ERM2 exchange rate mechanism since 2004, but it has just received a positive assessment of the European Commission, after being an example of strict fiscal discipline and deep reforms for several years. Of all nine countries covered by the assessment of the Commission (Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden) only Estonia covers all criteria for euro introduction.

"The assessment and our proposal is also a strong signal about the euro area and to the EU more broadly. It underpins the role of the euro as medium-term policy anchor and confirms that sustained policy efforts and a long-standing record of stability-oriented policies generate concrete results”, the Commissioner for Economy and Monetary Affairs Olli Rehn commented. .

In other words, membership in the euro area, particularly in a delicate moment as the current, is not just a way to join the club of "the rich", nor a guarantee that there will always be someone to rescue you in difficult moments, nor simply an attractive pre-election promise. It is the result of a constant and resolute national policy toward financial stability and economic growth. For everyone who thinks otherwise, the Commission has provided a difficult test in early 2011 when the first economic semester will begin.