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17th Feb 2020

EU budgetary proposals draw immediate rebuke

  • Plans for a peer review of national budgets have proved to be the most controversial aspect of the plans (Photo: Jorge Franganillo)

European Commission proposals to step up economic co-ordination inside the European Union have drawn an immediate rebuke from Sweden, with Stockholm deeply unhappy over plans suggesting member states should scrutinise each others' national budgets ahead of national parliaments.

Presenting the plans on Wednesday (12 May), senior officials from the Brussels-based executive body defended the controversial proposals, saying greater economic co-ordination was necessary to prevent future repetitions of the current debt crisis that has threatened to break apart the euro area.

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"Member states should have the courage to say if they want an economic union or not. Because without it monetary union is not possible," commission president Jose Manuel Barroso told journalists.

"I am confident that member states are determined to follow suit on our proposals to reduce the risks resulting from our interdependence for the benefit of our citizens," he added.

Despite the commission chief's "confidence", the first criticism did not take long in coming. Speaking at a press conference in Stockholm, Swedish Prime Minister Fredrik Reinfeldt said it was "strange" that countries with sound budgets should be scrutinised by their EU partners.

"That this should concern all countries is something we find a little strange," he said, adding that the peer review system "could perhaps be possible for [countries] with a budget policy that goes against the [EU] stability and growth pact."

The pact limits EU government budget deficits to three percent of GDP and debt levels to 60 percent of GDP, but has suffered repeated breaches in recent years by the vast majority of EU states, leading investors to baulk at the rising debt piles of certain national capitals.

Under the commission communication, eurozone members could even find themselves outvoted on their national spending and revenue raising plans.

"The Eurogroup [of eurozone finance minsters] should have a crucial role to play in this new system of enhanced coordination and, where appropriate, have recourse to formal decision making as provided by the Lisbon Treaty," says the document, diplomatic language for qualified majority voting.

Toughening up the pact

Increasing the effectiveness of the EU's budgetary rules is the primary building block of the commission's proposals.

Together with the controversial ex-ante peer review system of national budgets, a measure that could also go down badly with the newly elected Conservative coalition government in London, the communication also proposes that the pact be given extra teeth through the provision of tougher penalties for states that repeatedly break the rules.

Runaway spenders could be issued with quicker warnings, forced to place capital in "interest-bearing deposits", or suffer reduced payments from the EU budget, suggests the document. In theory, suspension of EU money for poorer regions, known as cohesion funds, can already be withheld under current rules, although EU states vary hugely in the money they receive under this heading.

"Broader and more timely use of EU budget expenditure as an incentive for compliance should be considered when discussions on the next financial framework [2014-2020] are being prepared," says the document. "The aim should be to establish fair, timely and effective incentives for compliance with the stability and growth pact rules."

Under the plans, greater emphasis would also be placed on member state debt levels, so that deficit cuts also ensure sufficient drops in national debt levels. Greece's debt levels are expected to rise this year, despite tough cuts.

Macroeconomic imbalances and a permanent crisis fund

Underlying macroeconomic imbalances between different member states have also been blamed for the current crisis, although last month saw Germany hit back at French suggestions it should boost domestic demand by increasing wages, a measure that would undoubtedly hurt the country's competitiveness.

Under the plans, certain indicators such as labour unit costs, productivity, employment rates and current account levels would be compiled into scoreboards and also subject to further peer review.

"It is not to make the more competitive less competitive," insisted Mr Barroso, "It is to make the less competitive more competitive."

Finally the plans envisage the setting up of a permanent crisis mechanism along the lines of the agreement reached by EU leaders and finance ministers last week, as the €750 billion support mechanism expires after three years.

"In our view it is better to be safe than sorrow and prepare for worst case scenarios," said economy commissioner Olli Rehn.

The ideas paper is up for discussion by EU finance ministers next week, with any concrete legislative proposals to follow later, depending on the response by member states.

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