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Fiscal rules: Timing is everything

In your recent policy paper you are proposing a one year extension to the excessive deficit procedure. What is the background to this? When the procedure was put in motion for the countries involved, which are more than 10 within the euro area, it was 2 or 3 years ago, when one could not imagine […]

By: Date: September 20, 2012 Topic: Macroeconomic policy

In your recent policy paper you are proposing a one year extension to the excessive deficit procedure. What is the background to this?

When the procedure was put in motion for the countries involved, which are more than 10 within the euro area, it was 2 or 3 years ago, when one could not imagine that the economic situation in 2012 would be such that we have negative growth for the euro area as a whole as already forecasted by the commission in March, April of this year.

So really asking countries to make the budgetary effort that is necessary for many of them to go below the 3% deficit by 2013 would really be a substantial effort and an effort that would aggravate the current economic condition. So we would have even more negative growth. In a sense it would be self-defeating. We are not saying that countries don’t need to make an effort, but the effort needs to be less than was anticipated simply because the economic situation is worse.

And a delay is the right medicine given that time at the moment is of the essence during the crisis.

Yes, I think a delay is not only the right medicine, is also one that is foreseen by the European rules themselves. The rules have sometimes being accused of being stupid, but they are not. There is much more flexibility in the rules now than there used to be. What we say in the paper is that the rules are not bad at all, but we have to use the flexibility there is precisely to give this one year. The flexibility should come from the fact that the Commission makes an assessment of the economic situation in the euro area, as it has already done several months ago and is likely to do again in its autumn forecast. 2012 is not a good year and 2013 is not likely to be one either. Take that into account, don’t ask countries to make efforts that would be self-defeating, and give them an extra year, but probably ask something in return.

What would be the challenges in implementing this policy? How prepared would the Commission and member states be to deviate from the current fiscal path?

I think there are two challenges that the Commission is facing in implementing the flexibility that the rules allow. One is to be seen as equitable between the countries that have already done quite a bit of effort and those that still need to make efforts. The Commission doesn’t want to be seen, and rightly so, as acting on behalf of one group of countries versus the other. It has to make the convincing case that it is acting in the interest of the euro area as a whole.

The second element is that countries that would have that flexibility, those that otherwise would need to make a counterproductive effort, they need to give something in exchange to the euro area for having the postponement. I think that what needs to be obtained from them is the commitment and more than commitment, the decisions, on a number of structural reforms. This needs to be quid pro quo. One gives flexibility but gives flexibility in exchange for reforms that need to be made anyway. In a sense is in the same spirit of the recent decision by the Central Bank that also said with the OMT program that it would intervene in the bond markets for Spain or other countries, but in exchange for a number of conditions. It is the same kind of deal. It’s up to the European authorities, then it was the Central Bank, now it is the Commission, to put forward which are the terms of this bargain. One year extension in exchange for structural reforms.


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