Thursday, 11 October 2012

Fiscal Plans for the EU Members?

Although it just recently came to my attention, Angela Merkel had proposed a "Fiscal Plan" for preventing excessive debt burdens since December 2011. An example of her proposals is that each country should limit its fiscal deficit to about 0.5% of its GDP. In the case of deviations from this rule, fines should be imposed to the nation. In response to this, Luxembourg Prime Minister Jean Asselborn gave an interview to Der Spiegel  stating that the plan was a "waste of time and energy."Agreed. However, what is more important here is not that strict rules are imposed. Is what happens when they are not obeyed.

Budget Surpluses or Deficits of PIIGGS. Source: Wikimedia Commons
As many of you may remember, there was (and still is to my knowledge) an agreement between the EU nations called the Stability and Growth Pact. This was implemented in 1998 and it became famous for stating that no fiscal deficit should be greater than 3% and no government debt should be more than 60%. This pact was a German initiative by the mid 1990's. You can guess who were the ones to first break the pact: Germany and France. Yet what happened? Any fines, any rebukes? Nothing whatsoever. 

Earlier this year, the European Commission threatened to suspend subsidies for Hungary. Shortly thereafter, the nationalist Hungarian prime minister, Viktor Orbán, gave in to Brussels' demands, obviously considering the fact that 97 percent of all public investment in his country are financed to a significant degree by the EU. The same situation could happen to Cyprus, Malta, Greece and other small countries. Nevertheless, such measures cannot be implemented in countries like Germany, France, Spain and maybe Italy. Specifically, Germany did nothing over the last month to promote suggestions by the EU for reforming the tax-splitting provision for married couples and Spain has remained obstinate to change its tax policy. Even small countries like Cyprus, Belgium and Luxemburg have opposed to suspending automatic inflation-linked wage increases and Malta has refused raising the retirement age.

The EU now tries to water down Merkel's pact, which, inter alia states that if the European Council, is of the opinion that a debt-ridden member state "has not taken effective action to correct its excessive deficit," it can impose a fine amounting to 0.2 percent of GDP. I would like to see the day when fines are imposed to countries like Germany and France. Yet somehow, given the current situation, I do not believe that it is possible.

Most of the EU leaders proclaim that we need more Europe and more integration rather than less Europe. I couldn't agree more. In an excellent article in The Expositor, Daniel Cohn-Bendit and Guy Verhofstadt have stated that "With a European State, we would have a European government, a European Parliament (2 chambers), a European passport, maybe even a European army (it would enable to cut Defence spending)." These are the issues that have to be addressed by the EU. It is impossible to have a common policy with just common stability pacts and common fiscal policies. European integration is not implemented through economic integration, although hopefully this may lead the way for a whole new spectrum of policies covering not just the economy but the whole of European activity. We have reached a point where we are either united or divided.
P.S. On the same article Daniel Cohn-Bendit has commented that “European enterprises participated in the corruption in Greece: other countries benefited from the high Greek defence spending, so they said nothing”. This brings a whole new perspective to the situation does it not?

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