This post is nothing new. It is just a reminder for non European readers (or for distracted European readers), about the way things work in the EMU. The German Bundesbank President Weidmann violently attacked the European Commission for failing to enforce fiscal discipline within the Stability Pact.
What is wrong with this? Is this not just another confirmation of the old cliché that Germans are obsessed with respecting the rules?
Well, think again. Everybody knows that EU countries need to curb their public deficit to be below 3% of GDP, and need to aim to structural balance. But it is less known, especially outside Europe, that since 2011, as a part of the so-called “six-pack”, the EU introduced the Macroeconomic Imbalances Procedure (MIP), “which aims to identify, prevent and address the emergence of potentially harmful macroeconomic imbalances that could adversely affect economic stability in a particular Member State, the euro area, or the EU as a whole”.
This procedure builds on a scoreboard of 14 indicators, among which we can read the following:
- 3-year backward moving average of the current account balance as percent of GDP, with thresholds of +6% and -4%;
Yeah, that is right, at the very first place. And guess what, Germany’s current account surplus, since the MIP came into force has been above 6% every single year. (it is expected to be 9% in 2016).
And yet, no corrective action has been imposed, and of course no sanctions. I understand that Germany has no problems with not being sanctioned. But maybe it would be wise to keep a low profile regarding others’ violations..
So, for once, I agree with Jens Weidmann: the Commission should be harsher on those who do not respect the rules. And of course, it will, but just with some. Among the many problems European governance has, this is not the least: all animals are equal, but some animals are more equal than others.
Just a quick note on yesterday’s announcement by the Commission that virtuous countries will be able, in 2013 and 2014, to run deficits and to implement public investment projects.
Faced with an excessive enthusiasm, Commissioner Rehn quickly framed this new approach within very precise limits, that are worth transcribing:
The Commission will consider allowing temporary deviations from the structural deficit path towards the Medium-Term Objective (MTO) set in the country specific recommendations, or the MTO for Member States that have reached it, provided that:
(1) the economic growth of the Member State remains negative or well below its potential
(2) the deviation does not lead to a breach of the 3% of GDP deficit ceiling, and the public debt rule is respected; and
(3) the deviation is linked to the national expenditure on projects co-funded by the EU under the Structural and Cohesion policy, Trans-European Networks (TEN) and Connecting Europe Facility (CEF) with positive, direct and verifiable long-term budgetary effect.
This application of the provisions of the SGP concerning temporary deviations from the MTO or the adjustment path towards it is related to the current economic conditions of large negative output gap. Once these temporary conditions are no longer in place and the Member State is forecast to return to positive growth, thus approaching its potential, any deviation as the above must be compensated so that the time path towards the MTO is not affected.
For once, the Commission is not vague about what is allowed and what is not, and the result is that this announcement will turn out to be nothing more than a well conceived Public Relations operation. Allow me to attach some numbers to the Commission proposal.
The European Council meeting, next Monday, should finally lift the veil of mystery that has surrounded the new “fiscal compact”, the set of rules supposed to govern fiscal policy in EU member countries. As of now, the only official document in our hands is the Statement approved by the Heads of State and Government at the December 9 meeting.
I have argued at length that I am not in the camp of those who believe fiscal profligacy is the source of EMU problems (recently, here and here). Rather the contrary, I always thought (see for example here and here) that even the current rules de facto prevented EMU countries from effectively using the standard tools of macroeconomic policy.