Deficit Rules The Not-So Bottom Line

As Jean-Claude Juncker, the president of the European Commission, pushes for investment and growth, he is willing to relax Europe's deficit rules.
Heading for growth even if that means tweaking the rules a bit.

A new wind is blowing in Brussels when it comes to economic policy.

For Mr. Juncker, investment and growth have the highest priority, taking priority over reducing government debt in the euro zone, which remains high, according to a statement released Tuesday on the interpretation of E.U. budget rules of the so-called stability and growth pact.

Budget rules are now only partially applicable if euro countries finance investment spending with new borrowing, the commission said.

Violation of the budget rules, with permission of E.U. member countries, was partially responsible for the euro zone debt crisis of 2011 and 2012.

"A temporary softening" of the austerity policy could be justified, the European Commission writes.

The statement comes as investors are increasingly worried about Greece's fiscal situation, with elections later this month and the likely winner demanding a further reduction of debt repayments.

German officials, who generally favor fiscal prudence and oppose relaxing E.U. budget rules, had mixed responses.

The document, backed by Valdis Dombrovskis, the new European Commission vice president for the euro and social dialogue, and Pierre Moscovici, the European commissioner for economic and financial affairs, did not remain uncontested in Brussels.

In fact, the debate among the 28 E.U. commissioners lasted longer than planned on Tuesday. Several commissioners were apparently upset because they had seen the 16-page text only briefly that morning, sources close to the commission said.

In particular, national contributions to the new European Fund for Strategic Investments, EFSI, are to be fostered in the stability pact. The fund, announced by Mr. Juncker before Christmas, currently has assets of €21 billion ($24.7 billion). That isn’t much, given the massive investment gap in Europe, which some economists estimate at more than a €1 trillion.

For this reason, Mr. Juncker hopes that governments will reach into their national treasuries to augment his fund. But no one has been willing to contribute so far.

The commission aims to change that.


EU Budget rules changes growth and stability pact Juncker investment fund 2015-01-14 Textgrafik


Capital contributions to the EFSI would “not be counted" in the valuation of national budgets, according to the commission statement on the “best use of flexibility in the existing rules of the stability and growth pact."

In practice, this means payments to Mr. Juncker's fund are likely to drive up deficits to above the 3-percent threshold. The punitive procedure that would normally be triggered by an excessively high deficit would "not be initiated," according to the statement.

Exceptions to the pact are also expected to apply to other investment expenditures, independently of Mr. Juncker's fund. "A temporary softening" of the austerity policy could be "justified," according to the statement. But such an exception would only apply to member states not already involved in punitive proceedings for exceeding the deficit threshold – currently 11 of the 19 countries in the euro zone.

There is a third instance in which the stability pact is to be treated with greater flexibility than before. When a country introduces structural reforms, it is given additional time for budget consolidation. Under the new procedure, this would also apply to the eight euro zone countries whose budget deficits exceed the E.U.'s 3-percent threshold, including France, Portugal, Greece, Spain and Ireland.

Normally, these countries would have to push down their deficit rates to below the E.U. threshold within a year, according to the statement. In the event of "important structural reforms," however, the government in question could be given more time.

The European Commission is remaining true to the path of consolidation and is not questioning the 3-percent threshold for new borrowing. Burkhard Balz, Member of the European Parliament

Mr. Dombrovskis, who is from Latvia, and Mr. Moscovici, who is from France, had agreed on this wording, according to sources in Brussels. Both men apparently hope the guidelines will provide political impetus for structural reforms.

German E.U. Commissioner Günther Oettinger is apparently less enthusiastic. He doesn’t like the fact that, in the future, reform plans would be enough to extend the deadlines for budget consolidation. Reforms, he argues, should only be recognized when approved by the parliament of a given country.

Initial reactions to the announcement from German conservatives were mixed.

"The commission apparently wants to soften the stability and growth pact under the cloak of ‘flexibility’ – this would be a highly dangerous signal," warned Herbert Reul, the chairman of the Christian Democrat parliamentary group in the European Parliament. In contrast, his fellow party member Burkhard Balz said: "The European Commission is remaining true to the path of consolidation and is not questioning the 3-percent threshold for new borrowing."

Marcel Fratzscher, president of the German Institute for Economic Research, called on E.U. countries to finally contribute to the bloc’s investment fund. "I have no understanding for the hesitant support from the member states,” Mr. Fratzscher said. I would like to see the German government, in particular, quickly bulk up the program with money."

So far, German Finance Minister Wolfgang Schäuble has rejected this possibility.


Ruth Berschens is Handelsblatt's bureau chief in Brussels. Donata Riedel covers economic policy in Berlin. To contact the authors:[email protected], [email protected]