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24th Oct 2021

Commission defends 'intelligent' fiscal policy

  • 'If we had pushed in a more aggressive manner, it would have been absolutely counter-productive,' EU finance commissioner Pierre Moscovici told journalists (Photo: Jorge Franganillo)

The European Commission rejected on Thursday (12 July) accusations from the guardians of EU finances that its monitoring of fiscal policies was too lax and failed to produce results.

"Our choices were economically justified, politically intelligent and socially fair," EU finance commissioner Pierre Moscovici told journalists.

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"If we had pushed in a more aggressive manner, it would have been absolutely counter-productive. It would have further weakened growth without improving the debt to GDP ratio," he argued.

In a long and detailed report, the auditors scrutinised the commission's monitoring of member states fiscal and economic policies - the so-called European semester - and in particular one of the mechanism's tools: the preventive arm.

The preventive arm was introduced on 1997 as part of the Stability and Growth Pact (SGP), to try to keep public deficit and debt in the limits set by the pact - 3 percent of GDP for the deficit, 60 percent for the debt.

The auditors concluded that the commission "has extensively used discretionary powers to reduce the adjustment requirements. It thus did not give the necessary importance to reaching the main objective of the preventive arm regulation."

Preventive Arm vs Corrective Arm

They argued in particular that flexibility rules introduced by the commission in 2015 and 2017 were "appropriate in principle" but that "specific provisions were not time–bound and effectively went too far in practice particularly when implemented during more normal times."

They also found shortfalls in the corrective arm, the mechanism that is triggered when member states do not respect the fiscal requirements.

"The credibility of the preventive arm has been further eroded by the developments in the corrective arm," the auditors said in their report.

They pointed out that for the commission, "requirements of the corrective arm can be fully met just by cyclical recovery," and that in consequence, member states "do not have to fulfil the requirements for improving their structural balances."

They called on the EU executive to "explore ways within the legal framework to ensure that the level of structural adjustment required under the preventive arm is also delivered by member states under the corrective arm."

The auditors also noted that the commission did "not distinguish enough between those member states that do have a high level of debt and others."

They inisted that "the weakened SGP framework" did not ensure that the most indebted countries reach their targets. They argued that this "might trigger market concerns about their fiscal sustainability in the next recession."

The report's conclusions are a direct blow at the current commission, which has advocated flexibility as an "intelligent" way of implementing EU rules.

"It was not breathtaking Keynesianism," Moscovici said Thursday, adding that the commission was "extremely cautious."

"We were in a crisis that was followed by an extremely soft recovery only two years ago," he argued.

Suggesting that the auditors' view of the situation was too narrow, he insisted that the commission's action was "justified economically, if not from an accounting point of view."

The report, written by a team of experts led by a former International Monetary Fund official, joins earlier criticism that the commission is bending the rules for political reasons.

Former German finance minister Wolfgang Schaeuble suggested in particular that the commission was not "neutral" and that other bodies like the European Stability Mechanism should be entrusted with the implementation of EU fiscal rules.

"The commission doesn't have the will to go into direct conflict with the individual member states and therefore doesn't prioritise the implementation of joint agreements," a German government report also said last year.

But in its written reply to the auditors, the EU executive noted that all its decisions were approved by member states, and it rejected the idea of a "more mechanical application of the rules, which does not take account of the prevailing risks to economic recovery."

Commission warns Italy over high debt level

The Italian government must demonstrate it is making an effort, or the EU will consider launching a procedure. France and Romania are also under scrutiny.

Juncker seeks budget whip on unruly states

EU officials want discretionary powers to suspend funds from states that violate treaty values, in a bold power grab amid likely clashes with Hungary and Poland.

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