ECB attacks Commission’s easing of fiscal rules

The European Central Bank has criticised the Commission's easing of EU fiscal rules as "counter-productive", in its latest economic bulletin published Monday (2 November).

The ECB's concerns focus on the structural reform clause, which is aimed at granting additional fiscal room to member states to balance their public accounts, as reforms could carry short-term costs. Evidence shows that only a small set of structural reforms appear to have direct short-term budgetary impact. Therefore, this clause should be “carefully applied”, the ECB said in its latest economic bulletin.

Moreover, the European Central Bank warned against granting additional fiscal flexibility to member states under the excessive deficit procedure, with reform plans only announced and yet to be implemented, as the Commission´s new approach permits.

Giving this extra time to meet the 3% deficit threshold before reforms are implemented would require “continuous monitoring” of the national governments' efforts and enforcement actions in case the promised reforms are not implemented. “Otherwise countries may have an incentive to delay or even backtrack on their plans once the fiscal flexibility has been granted," the ECB said. Therefore, the use of this clause could be “counterproductive”.

The use of this ex-ante clause has been the most controversial element from the outset of the executive´s communication. The ‘hawkish’ camp, led by Germany and the Council's legal services, believe that the European Commission overstretched the Stability and Growth Pact.

>>Read: EU drags on Stability and Growth Pact reform

In the ECB's view, the use of this clause is hampered by the difficulty to assess implemented structural reforms. This exercise entails a large amount of data, as it requires not only judging the adoption of the new piece of legislation itself, but also various implementing rules. Therefore, “quantifying the impact of implemented structural reforms is subject to a high level of uncertainty”.

Looking at the empirical and research experience, the ECB notes that the net effect is difficult to estimate in, in terms of labour and product market reforms. Only a “systemic” pension reform seems to negatively affect the national coffers in the short run. Even more, in some cases the reforms bring a short-term positive fiscal impact, like tightening unemployment benefits.

In light of the difficulty of estimating reforms, the ECB recommends a “cautious application”. If used, the ECB recommends applying this clause in a “clear and transparent way”, in order to avoid unequal treatment among the member states.

>> Read: Commission vague about fiscal leeway for refugees

France, Belgium and Italy have already profited from this reform clause. The French case raised eyebrows in Brusselss, as it was the third time that Paris obtained additional time to balance its public accounts, this time around thanks to Pierre Moscovici, the French Commissioner and former member of François Hollande’s government. Smaller member states, including Portugal and Ireland stressed the need of equal treatment for all 28 member states.

In order to avoid further tensions, ECB President Mario Draghi has insisted in recent months on the need for an institutional overhaul to bolster the economic governance. In his view, the rule-based approach, represented by the SGP, “can only really be credible if they are applied with very little discretion”, he said last March. But in the EU, “the fiscal rules have repeatedly been broken and trust between countries has been strained".

>> Read: Draghi calls for ‘quantum leap’ in eurozone integration

For that reason, Draghi called for a shift toward an institution-based system as the basis of “more credible and more flexible policymaking".

The Italian central banker left his fingerprints on the Five Presidents’ Report, which recommended the setting up of national competitiveness councils to keep track and shape policies aimed at fuelling the EU's output. The Commission put forward its recommendation for these bodies on 21 October.