Reforming the EU

The Stability and Growth Pact

Paul Sweeney07/01/2020

An EU rule which must be radically reformed is the Stability and Growth Pact (SGP). It is a set of rules intended to ensure member states in the Union maintain fiscal discipline. The key is that member states must stay within the max of a 3% of GDP budget deficit while maintaining a 60% debt- to-GDP ratio. Governments are punished if they don’t adhere.

But this was planned under the assumptions of a 3% growth rate of real GDP and a max of 2% rate of inflation. However, over the last 20 years, the euro area grew only at average annual rates 1.4% and inflation has been low in last decade, raising doubts about the adequacy of the deficit reference value - even for fiscal hawks.

Embedded Austerity for Some

The SGP is especially harsh and against the busines cycle on the weak countries, especially when they are already suffering from high unemployment and low growth. This subsequently leads to more unemployment, slower growth and more pain and suffering. On the other hand, strong countries like Germany, with no public deficit, no public spending cuts, are allowed to run massive sustained surpluses, adversely affecting other states – but with no sanctions.

The SGP was part of the Maastrict Treaty of 1992. It is notable that 60 percent of voters on lower incomes, lower wealth and less education voted against, as Thomas Piketty showed. This and other votes show the economic elites support the EU but the less well-off are critical. The EU needs to address this class divide, now. The public sector is large in the modern economy and a key objective of conservatives is to slice and dice the public sector for the benefit of the non-entrepreneurial private sector (a surprisingly large part of it). This is being achieved by all kinds of financialisation which purport to be less costly, take over the risks, but generally achieve the opposite.

Rules are Needed

Do we need fiscal rules in the EU? Yes, but not these ones, even as “reformed” since 2006. We need fiscal policy coordination in the EMU. Most share the view that in the absence of specific rules, fiscal policy would lead to excessive deficits and hence affect the conduct of the common monetary policy. Joe Stiglitz argued that the framers of the rules were well intentioned, in their time. “They had faith in markets, but lacked an understanding of the limitations of markets and what was required to make them work. The unwavering faith in markets is sometimes referred to as market fundamentalism, sometimes as neoliberalism” and while market fundamentalism has been discredited especially after the collapse in 2008, their ideas have not and he holds they are still dominant, especially in Germany.

The SGP, which outlaws Keynesianism in the union by curbing pro-cyclical and innovative public financial management by member states, needs change so badly that even the EU itself listed 101 reasons for reform in 2006. That paper agreed “there is no consensus on how best to co-ordinate fiscal policy.” These rules had been made by those promoting financialisation, shrinking the state and ignoring inequality. In response, the EU did some minor reforms. The first reason for reform which they cited was to admit that France and Germany had rode roughshod over the rules without sanction. The EU also admitted that there was fundamental disagreement on the role of fiscal policy and over institutions among economists, with at least four differing schools of thought. The Troika took over economic management from four democratic governments, Ireland, Greece, Portugal and Cyprus, under the SGP, imposing austerity, rules to curb the role of the public sector, privatise (ironically, as the state bailed out the private sector here) and making growth and investment extraordinarily difficult at the biggest downturn in the fiscal cycle since 1930.

While there is a little more flexibility now, even the EU’s own Fiscal Board found in its 2019 study of these rules, “that the growing complexity of the functioning of the SGP has become problematic, raising questions about transparency, equal treatment among countries, and communicability to the public.”

 

Conclusion

The Stability and Growth Pact has imposed real harm of some EU states especially Greece and Ireland though unnecessary austerity. We need fiscal rules but ones which promote sustainable growth, climate repair, reduce inequality, progressively reform taxes and promote social justice. We also need to coordinate taxation policies in the Single Market if it is to continue to work. Not harmonise but coordinate all taxes – income, gains, corporate, within bands for all states, with no funny stuff tolerated any longer (eg no capital gains tax in Portugal).

Posted in: EconomicsEuropeTaxation

Tagged with: stabilityandgrowthpact

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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