Many progressives are claiming that the EU has seen the light as evidenced by their relaxation of the harsh Stability and Growth Pact rules during the pandemic. There are even papers coming out advocating a ‘Post Third Way’ revival of social democratic forces in Europe to further integrate and reorient it along the lines of the social Europe narratives. I think this enthusiasm misrepresents what is going on in Europe at present. The hard-core, neoliberal DNA has not morphed. There has been no relaxation of the SGP rules given that a thorough knowledge of the legal basis of the Pact shows that there is scope in the rules for what is going on at present. Further, there is evidence that even though the temporary provisions in the SGP are being exercised, the European Commission is resorting to blackmail by imposing conditionality on Member States who want access to the stimulus funds. It seems that to get the funds, Member States have to fast track structural reforms, which means the stimulus funds are not stimulus funds at all, but, rather offsets, partial or otherwise, for the damage that cutting pensions etc will cause. Europe’s neoliberal DNA is still at work!
The EU provide a massive knowledge base to learn about the – Legal basis of the Stability and Growth Pact.
The most relevant legal statements are:
1. Article 121 – of the Treaty on the Functioning of the European Union, outlines the responsibilities (and powers) of the Commission to warn Member States who breach the fiscal rules (“risk jeopardising the proper functioning of economic and monetary union”) and the Council (after recommendation from the Commission), to force the Member States to change policies.
2. Article 126 – of the Treaty on the Functioning of the European Union, specifies the excessive deficit mechanism and the monitoring procedures that the Commission employs.
It also considers the enforcement processes via the Commission and Council and the penalties that will be applied should a Member State not obey directions from the Council.
3. Protocol (No 12) – of the Treaty on European Union, covers the operation of the excessive deficit procedure defined in Article 126 of the Treaty on the Functioning of the European Union.
This is where the 3 per cent deficit rule and the 60 per cent debt rule are defined.
It also places responsibility on the Member States to conduct fiscal policy to ensure they meet these limits and to force them to propose their planned deficits to the Commission for prior approval.
4. Article 136 – of the Treaty on the Functioning of the European Union, describes the legality of the surveillance measures to ensure “budgetary discipline”.
With the so-called “preventative arm of the Stability and Growth Pact”, the Commission pursues a “Medium term budgetary objective (MTO)”, which:
… is defined in cyclically adjusted terms, net of one-off and other temporary measures … One-off and temporary measures are measures having a transitory budgetary effect that does not lead to a sustained change in the intertemporal budgetary position.
In a Council decision adopted on July 12, 2002, the technique for estimating potential output (and therefore cyclical deviations) was outlined.
The sorts of events that are considered to be temporary include:
… the sales of non-financial assets; receipts of auctions of publicly owned licenses; short-term emergency costs emerging from natural disasters; tax amnesties; revenues resulting from the transfers of pension obligations and assets.
In other words, within the rules-driven, treaty process governing fiscal policy in the EMU, there is an allowance for a temporary relaxation of the rules in the case of a natural disaster, which the pandemic surely is.
Whether an event constitutes “temporary” status is determined by the Commission not the Member State. So the relaxation of the rules is at the discretion of Brussels not the democratically-elected nation state.
The Commission will only allow the temporary clause to be activated if:
… the forecasts provided by the Commission indicate that the deficit will fall below the reference value following the end of the unusual event or the severe economic downturn.
So while the progressive, pro-EU forces might be celebrating the relaxation of the fiscal rules, the reality is that the Commission is acting with the Stability and Growth Pact framework and there is no hint that any major liberalisation is being contemplated.
Don’t count your chickens!
Why would I say that?
Well, I read an article in the English-version of El Pais (December 8, 2020) over the weekend – Brussels urges Spain to reform pensions and jobs in return for EU funds – which confirms my view.
First, the so-called stimulus package – NextGenerationEU initiative – has been a drawn-out affair that took until November 20, 2020 to be finalised.
The package is only €750 billion, which is grossly inadequate considering the scale of the disaster confronting Europe at present.
Almost all of the package €672.5 billion is in the form of loans and grants “to support reforms and investments undertaken by EU countries” (Source).
And €360 billion of the €672.5 billion will be loans, which means they have to be paid back.
The remaining funding will be administered through the – the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the European Fund for Aid to the Most Deprived (FEAD).
So, the reality is that the package is a poor response to the crisis.
But then we get to the conditionality (“to support reforms”) and the EU has built on its Troika days and its dealings with the IMF to ensure that these funds are not going to be at the discretion of the Member States receiving them.
Rather, the EU will pressure the recipient Member States to further deepen the neoliberalism within Europe.
The El Pais article reports that the European Commission is pressuring Spain to make deep structural changes:
… on three fronts – pensions, jobs and market unity – and it is demanding to see a credible and coherent plan setting out Madrid’s reform agenda as part of the deal to release a recently approved package of European stimulus aid.
As the article notes:
“Reform” is a loaded word, because in recent years it has been used as a euphemism to avoid the term “cuts,” and because it is associated with the austerity imposed during the 2008 financial crisis by the so-called Troika made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).
The article also notes that “Brussels has since changed its approach” – while the temporary measures relating to the Stability and Growth Pact are in place – they are getting around the obvious public relations disaster of inflicting austerity directly on the Member States – by resorting to a type of blackmail:
… instead of seeking to impose reforms, it is asking countries to approve structural changes in exchange for a flood of money included in Next Generation EU, a European recovery fund aimed at addressing the fallout of the coronavirus crisis that will allocate €750 million in total, half of it in grants. Spain has secured €140 billion of that amount, making it one of the biggest beneficiaries.
So a subtle shift in the way the EU is operating in relation to the Member States.
They have worked out that it would look too awful to march in with a Troika-like gang, as they did to Greece, and trash the joint.
But they also know that even with the fiscal limits relaxed for a while and the ECB buying up most of the debt being issued (which is calming the bond markets – ‘closing the spreads’), that Member States, especially the worst hit like Spain are keen to get their hands on the extra cash under the NextGeneration funding.
Blackmail is effective when one is dealing with desperate counterparties.
And there is an additional rub.
A stimulus package is not meant to offset damage that the government policy shifts actually cause. It is meant to provide extra spending that, via the spending multiplier, increases incomes and output and employment, while non-government spending is weaker.
In this case, the ‘structural’ cuts that the EU want Spain and other Member States to make are actually going to make the economic problems arising from the pandemic worse.
So the NextGeneration funds would only be assisting in offsetting some of that damage rather than actually stimulating the economy.
The neoliberal EU belief is, of course, that if you scorch the earth – cut pensions, cut wages, cut employment protections, cut regulations that protect communities from capitalist excess, and more – then the ‘market’ will shine forth and that underpins future growth.
The evidence is not supportive of that ‘trickle-down’ sort of reasoning.
The evidence suggests that inequality rises, growth rates slump, productivity growth wanes, public infrastructure deteriorates to the point that bridges have to be closed along major arterial routes because they are dangerous, education and health systems buckle, poverty rates rise, suicide rates rise, and, social instability rises among other pathologies.
The timetable is also rather … shall we say European – that is stretched and way too late.
They want to start spending money in April 2021 some 16 months after the pandemic started to ravage the economies.
Needless to say, the ruling Socialist Party, is once again being coopted by the neoliberals in Brussels and has drafted a “pension reform plan”, which the EU Commission is considering.
The current pension is indexed, which retains the real value for recipients.
The EU want to break the indexation, which means it is happy to see the real living standards of pensioners in Spain fall over time.
Where do they go from here?
While the EU has an almost infinite capacity to snake around their rules – in this case, to extend the temporary status of the Member States fiscal positions and extend the horizon of pandemic effects – the question that has to be considered is will they ever be able to go back to the processes that have been in place under the SGP?
It is likely that the pandemic effects will be long-lived and the scale of the current health disaster is unknown as yet.
Perhaps a vaccine will bring it to an end rather quickly.
But the damage will linger, so there is some time available for the EU in this regard.
But, the treatment of Spain in relation to the NextGeneration funding makes is obvious that the neoliberal intent is alive and well and nothing within the legal framework has been changed.
The temporary flexibility is part of that framework.
There are growing voices arguing for some changes to the fiscal rules.
One argument is to transition for rules to ‘standards’ – see the paper by Blanchard, Leandro and Zettelmeyer – Revisiting the EU fiscal framework in an era of low interest rates (March 9, 2020).
They argue that monetary policy is now ineffective (it actually always was) and with low interest rates the sort of ‘debt externalities’ that the fiscal rules were meant to guard against are less likely.
They should have mentioned that the debt externalities are not likely to be a problem because the ECB is buying the debt up! But that would be a step too far for these authors.
Further, they argue that “demand externalities” are more worrying – “Fiscal consolidation in one country leads to lower demand and lower output in the other countries.”
It is also a pity that it has taken these characters this long to work that out.
Blanchard, was of-course, one of the architects of the disastrous Greek bailout, when he was IMF Chief Economist. The disaster forced the IMF to admit that the multipliers they had used were completely wrong.
He is now strutting around claiming to be leading the movement towards fiscal dominance – and his mates Rogoff, Summers and all are all agreed.
They could have said that in 2000, when it was obvious Europe was going into an unworkable system, which has caused havoc for its citizens.
Anyway, with no debt externalities and plenty of demand externalities, the authors now say that the “EU rules must therefore be modified” (like 20 years too late).
Those who understood the damage the rules would wreak were saying in the 1990s that they were wrong.
So now they are advocating shifts from rules specified in “quantitative terms” to “standards”:
… qualitative assessments of the proper fiscal stance, with an ex-post adjudication mechanism.
What does that mean?
1. Member States “should also be given room to run deficits to stabilize their own output levels and to reduce an aggregate demand shortfall in the euro area” but maintain “low risk of sovereign stress”.
How that works when the ECB is hoovering up all the debt being issued is another question.
The authors clearly want the ECB to abandon its asset purchasing programs.
They claim that fiscal flexibility should terminate when Member States “are in danger of losing market access”.
Under current ECB purchasing behaviour, there is never a danger that the bond markets will stop buying government debt. It is like a picnic for bond investors!
2. The shift from rule to standard is like shifting from road rules that say “do not drive faster than 55 miles an hour” to “do not drive at excessive speed”.
So all they are proposing is to keep the provisions in paragraph 1 of Article 126 “Member States shall avoid excessive government deficits” and downplaying the Protocol (No 12) specifications of what constitutes an excessive deficit (the 3 per cent/60 per cent rules).
They cite New Zealand as a good example.
But New Zealand’s fiscal approach is pure neoliberal and prone to austerity and underspending – note how many children remain in poverty in that country after successive government cuts since the 1990s to support programs.
On enforcement, they claim that the ‘market’ will be one mechanism to promote the necessary discipline.
So allowing the Member States to be vulnerable to the vagaries of bond investors to “deter governments from overborrowing” and open them to the risk of “losing market access” is a way of enforcing standards without tight quantitative rules.
Of course, markets do not punish states that inflict austerity harm on their nations.
To overcome that problem, they opt for more rule enforcement, but think this should be embedded legally and enforced by the European Court of Justice or a similar body that would be set up.
In other words, take this component out of the political realm of the Commission or Council.
The problems of this approach are typically European: huge time delays, rise in democratic deficits and who would enforce the legal rulings, when they were finally made.
Remember, we are talking about cyclical policy shifts.
When the GFC hit, the Australian government shifted towards stimulus from ‘fighting inflation’ with austerity in a week.
Rapid shifts in policy also occurred in March this year to deal with the pandemic.
Imagine the chaos if some national court had to work out whether the stimulus packages were ‘legal’ or not in terms of excessiveness.
Overall, the problem with these suggestions is that the credit risk of government debt in the EMU is never that far from the surface, especially for the southern states.
The system is geared to austerity.
Some flexibility might be given but at a time of a global downturn, whether it arises from a pandemic or not, the stress on currency-using governments in the EMU from bond markets will rise very quickly, as we saw during the GFC.
The the debt sustainability issue bites quickly and pro-cyclical fiscal policy is enforced or insolvency ensues.
The problem is not the fiscal rules but the dysfunctional system in general.
Without a federal fiscal capacity that is complete and democratically legitimised there is no robust and stable future for Europe while the Member States are tied to the one currency.
The Blanchard type proposals are just more of the same.
Europe bungles on!
I do not share the hopes of fellow progressives that there has been a marked shift in mentality in Brussels such that the temporary relaxation of the harsh rules will be permanent.
The Commission is already working around the pandemic issues to retain its neoliberal bias.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.