European fiscal rules increasingly laughable

When the European Union was confronted with the corona pandemic, European budget rules, among other things, were temporarily suspended. Now that the pandemic no longer dominates our lives, the EU is gearing up to bring those rules back. But because the world has changed in recent years, according to many, those rules must also be adapted to the new reality. And so the European Commission came up with a proposal to adjust the fiscal rules before they come into force again in 2024.

The European fiscal rules need to be reformed, because the pace of deleveraging was unrealistic under the old standards. For too many countries, if they strictly adhere to the rules regarding the pace of deleveraging, their economies will collapse. Seen in this way, the desire to adjust things is understandable. The proposal from the European Commission, led by President Ursula von der Leyen (photo), basically gives countries more time to do something about their high debts. As a rule, governments are given four years to make some progress.

The danger here is that too little will happen, certainly because Brussels also proposes that if a country makes investments that fit in with the energy transition or can be related to sustainability, extra time will be added. I think that if that is adopted, there will be a department in all European ministries of finance that will do nothing more than look at every spending proposal 'how can we describe this in such a way that it contributes to the energy transition and strives for sustainability'.

Fines
But then you read on and you come across really laughable things. For example, that Brussels will monitor more strictly and impose fines if necessary. That all sounds nice, but the European fiscal rules were also reformed in 2011. Even then, Brussels would act harder, the European Commission was given that space. Since 2011, many countries have broken those fiscal rules again and again, without reason, but Brussels has imposed a total of 0 fines.

However, the proposal introduces a new baton for Brussels. This is where the proposal gets really laughable. In addition to financial fines, for example, there should also be something called a 'reputation sanction'. In other words: as a euro country you don't play by the rules, Brussels warns you that you don't play by the rules, you tell the Commission, in a civilized way, that it should mind its own business and then…then Brussels will use new weapon. How? Brussels will seek publicity, talk to the parliament of the country in question and organize missions to such a country.

Reputation
Talking to the national parliament? That often causes a country to break the rules! Organize missions? Nice trip for EU officials, that will be it and nothing more. And looking for publicity? For what purpose? To tell the outside world that Italy or France are not abiding by the fiscal rules? And that is not known by whom exactly!? Even the birds in the sky know that by now! Yes, according to Brussels, such a reputational sanction via publicity leads to higher interest rates, because it alerts investors that something is going on. Again: as if they didn't know that for a long time! 

Moreover: if interest rates in the eurozone rise too much, the European Central Bank (ECB) can intervene, which recently set up a new instrument, the Transmission Protection Instrument, for precisely that purpose. With your 'alert investors'. Brussels is losing sight of the big picture here, namely that you really have to do something about the high government debts and not cosmetically. Why should you do something about it? Because too much debt slows down economic growth and makes tackling problems - such as too high inflation - very difficult, because the required rate hikes can spell financial disaster. Because excessive debt increases the vulnerability of the economy and the financial system.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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