According to a Bloomberg story today, European lawmakers have strengthened the latest draft of the fiscal compact to reflect many of the criticisms made earlier this week by the ECB. EU finance ministers will discuss this latest draft at their next meeting on January 23rd. Should the structural budget deficit deviate “significantly” from the target of 0.5%, then there will be a centralised corrective mechanism which is triggered automatically. Although an improvement on the first draft, which attracted a great deal of ire from the European Central Bank, there are still some important questions to be answered such as what constitutes “significant” and exactly how the automatic centralised corrective mechanism is to work.
Apparently the European Commission will also gain the power to implement a timetable for fiscal convergence. It remains to be seen how binding any instructions from the EC prove to be. That said, the new Belgian government recently attracted the ire of the Commission because its growth forecasts were too optimistic. The Commission demanded urgent spending cuts from the Belgians in order to avoid the imposition of substantial fines. The real test of these powers will be whether the Commission is brave enough to tackle one of Europe’s larger economies for its fiscal transgressions.
The latest draft also gives the European Court of Justice (ECJ) the ability to impose fines of up to 0.1% of GDP on those countries that do not pass sufficiently binding balanced-budget laws. This sounds more promising, although the ECJ will not be able to enforce fiscal rules as the ECB had hoped.
Unfortunately, it appears that the draft still accommodates a wide range of excuses for missing fiscal targets, such as “exceptional circumstances” (economic downturns) or “unusual events”. The ECB had asked for this to be tightened as well. This is arguably the most troubling aspect of the whole draft; it appears that it is still too easy to miss budget targets without sanction. Also, those countries that sign up to the treaty will have up to five years to implement it.
Although progress on a decent fiscal compact is being made, on the surface at least it still appears too soft on fiscal miscreants. Any sense that this fiscal compact is just another Stability and Growth Pact without bite will weigh heavily on the single currency.