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16th Feb 2019

EU 'finance ministry' pardons Italy and Spain

Italy, Portugal, and Spain are unlikely to face sanctions for breaking EU budget rules, the European Commission has said, in what it described as a “political” decision by a kind of “common finance ministry”.

The commission said on Wednesday (16 November) that Italy was “at risk” of “significant deviation” in 2017 from the EU rule of keeping budget deficits under 3 percent of GDP.

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  • Schaeuble said in Bratislava that the Commission was not being "neutral" enough in the way it applied the rules (Photo: Tatra Summit)

It said so on the basis of prime minister Matteo Renzi’s draft budget for next year.

Finance commissioner Pierre Moscovici said Renzi was unlikely to face sanctions because he would “take into account” the costs that Italy incurred in the two earthquakes that it suffered this year and in taking care of migrants coming from Libya.

Moscovici said Portugal and Spain were also “at risk of non-compliance” in 2017.

He said that potential sanctions, which entailed withholding their benefits from the EU budget, would be “held in abeyance”.

Moscovici, as well as Valdis Dombrovskis, the commission vice-president in charge of the euro currency, said they would get off the hook because they were taking “effective action” to remedy the situation and because they wanted to give the new government in Spain a chance to get on its feet.

Moscovici said it would have been “masochistic” to propose a fine for Spain, just to lift the proposal “two minutes later”.

“We decided not to beat down this country, and that’s a good thing”, he said.

The commission acquired the power to vet and sanction eurozone states’ budgets during the financial crisis.

Succeeding years of bailouts, austerity, low growth, and high unemployment have been linked to growing EU unpopularity, posing a political challenge, however.

Moscovici and Dombrovskis, on Wednesday, said they had stayed within the bounds of EU rules in granting the leeway.

Moscovici said he had a “legal obligation” to the so-called stability and growth pact, but also that he had “political priorities” in his capacity as a form of “common finance ministry” for the eurozone.

Belgium, Cyprus, Lithuania, Slovenia, and Finland were also said to be at risk of non-compliance in 2017, but their faults were not yet entrenched deep enough to merit action.

France, and nine other euro states, were said to be “compliant” or “broadly compliant” for 2017, but Moscovici, who is a former French finance minister, warned France not to splurge money in 2018 in connection with next year’s presidential election.

The commission said average eurozone deficit would fall from 2 percent this year to 1.7 percent next year, after peaks of over 6 percent in the crisis.

Time to spend

It said this meant that the stability pact was working and said, in a nod to Germany, that it was time for those well-off enough to do so to start investing public funds to stimulate growth in the single currency area as a whole.

Marianne Thyssen also said the EU’s handling of financial affairs had been a “success” because unemployment had fallen from peak levels in 2008.

She said she understood that long-term unemployed people “feel bad 200 percent” about the current state of the economy, but she added that “we don’t have to be negative all the time”, because of the positive trends.

The commission’s proposals will be discussed by eurozone and EU finance ministers in the first week of December, with Germany likely to take a harder line.

Speaking recently in Bratislava, a the Tatra conference organised by the Globsec think tank, German finance minister Wolfgang Schaueble said: “If finance ministers don’t stick to the rules they’ve given themselves, where will trust come from in our currency?”.

He said that “neutral” institutions, such as the European Stability Mechanism, an EU crisis-management fund in Luxembourg, should take over the commission’s fiscal watchdog role if the Commission became too lax.

The French and Italian finance ministers, who were also in Bratislava, said the commission was right to take a political approach, however.

Germany has politics too

Greek prime minister Alexis Tsipras, whose country is off the chart in terms of budgetary non-compliance, attacked EU austerity on Tuesday.

He said, while meeting US leader Barack Obama in Athens, that Germany should write off some of Greece’s debt just as allied powers wrote off its debt after World War II.

Obama backed Tsipras on debt relief and voiced sympathy with Greek people who had lost jobs and income.

The outgoing US leader, who is flying to Berlin on Wednesday, also voiced sympathy with creditor states and said that they were right to have forced Greece to undertake reforms.

“The politics of this are difficult in Europe. And I think in fairness to some of the governments up north that I know are not always popular here in Greece, it's important to recognise that they have their own politics. And their populations and their institutions often are resistant to some of these debt-relief formulas”, Obama said.

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