Daniel Gros writes:\u00a0 The new European Commission headed by Jean-Claude Juncker is off to a rocky start.\u00a0 The European Union\u2019s fiscal rules are at issue, and the Commission \u2013 in principle the EU\u2019s watchdog \u2013 should bark loudly when they are flouted.
\nLast month, howls seemed inevitable after two large EU countries, Italy and France, submitted budget plans for 2015 that clearly violated their governments\u2019 vows of continued austerity. At first, the Commission dutifully rejected the two budgets as incompatible with the rules of the EU\u2019s Stability and Growth Pact (SGP).<\/p>\n
Within days, both countries offered mini-adjustments to their budgets, worth about 0.2% of GDP, and their finance ministers wrote to the Commission that their budgets should now be approved.\u00a0 The latest forecast reflects an even worse outcome for France and Italy this year than originally promised, with France\u2019s deficit set to increase slightly for 2015 and Italy\u2019s cyclically adjusted deficit expected to deteriorate. The Stability and Growth Pact prescribes an annual improvement of at least 0.5 % of GDP.<\/p>\n
The new Commission thus risks losing its authority from the very start of its mandate. Whether it does is a crucial question, because maintaining a high degree of credibility is essential to economic policymaking in the eurozone.\u00a0 The SGP\u2019s original rules were judged \u201cstupid\u201d by one former Commission president because the single-minded pursuit of a deficit below 3 % of GDP could be inappropriate during recessions. That argument was accepted, and the SGP was supposedly rendered more \u201cintelligent\u201d by, for example, permitting budget deficits to be adjusted for the economic cycle, adding medium-term objectives for expenditure, and introducing escape clauses.<\/p>\n
But the new rules obviously require a strong institution to interpret them, and whose judgment is accepted by everybody. Though checking whether a budget is below the SGP\u2019s ceiling of 3% of GDP may be a straightforward matter, there can be reasonable disagreement about whether the business-cycle adjustment should be estimated at 0.5% or 0.8% of GDP, or whether a country is adhering to its medium-term expenditure objective.\u00a0 The Commission is supposed to have the last word, thereby ensuring the rules\u2019 credibility and consistency \u2013 and it seems to have lost this fight in the first round. One could, of course, argue that the SGP should be scrapped, because austerity makes no sense when the eurozone faces the risk of deflation. But the Commission, not fiscally louche member countries, should be the one to decide that.<\/p>\n
The United Kingdom, which has been asked to pay an additional contribution to the EU budget of about \u20ac2 billion ($2.5 billion, which amounts to a rounding error of the UK\u2019s own budget).\u00a0 The UK\u2019s Office for National Statistics announced, proudly, that it had discovered that the country\u2019s gross national income (GNI) had been much higher than previously assumed, not only in 2013, but also in all previous years. Including the revisions for the 2002-2012 period, the difference comes to about \u00a3350 billion ($560 billion).
\nBecause every EU member state is obliged to contribute about 1% of its GNI to the Union\u2019s budget, the UK\u2019s data revision had to lead to a back payment of billions of euros. But British Prime Minister David Cameron\u2019s government has declared that it does not intend to pay money that \u201cthe European Commission was not expecting and does not need.\u201d<\/p>\n
These two cases threaten the EU\u2019s fundamental workings, which are based on a clear rulebook enforced vigorously by a strong Commission.\u00a0 The Commission must regain political and intellectual leadership and make its choice: either explain why the SGP rules must be followed even now, in the face of deflation, or agree with those who argue that the current environment calls for a fiscal stimulus. It cannot avoid taking sides by insisting publicly on austerity rules but then acquiescing when member states break them.\u00a0 Leaders in member states have to play their part as well. Pandering to populists may be attractive in terms of short-term electoral gains, but the long-term cost in terms of credibility, both their own and that of the EU, will be very high.<\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":" Daniel Gros writes:\u00a0 The new European Commission headed by Jean-Claude Juncker is off to a rocky start.\u00a0 The European Union\u2019s fiscal rules are at issue, and the Commission \u2013 in principle the EU\u2019s watchdog \u2013 should bark loudly when they … Continue reading ![\"UK's](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/11\/UKs-Position-in-EU-300x209.jpg\")
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