Can Europe Make It?

Playing by the rules? Budgets and brinkmanship in the EU

The eurozone did not arrive at the brink of collapse for lack of rules. But – perhaps befitting a political project pursued by legal and economic means – the rules that established the currency union often bent to political will.

Nicole Scicluna
9 November 2014

Pixabay. Public domain.

The eurozone did not arrive at the brink of collapse for lack of rules. The legal framework for the common currency was provided by the 1992 Maastricht Treaty and supplemented by the 1998 Stability and Growth Pact (SGP). The rules contained therein established ceilings for budget deficits and debt levels, explicitly prohibited bail outs and strictly circumscribed the mandate of the European Central Bank (ECB), limiting its focus to price stability. 

But – perhaps befitting a political project pursued by legal and economic means – the rules that established the currency union often bent to political will. One salient example is France and Germany’s violation, and subsequent watering down, of the SGP in the early 2000s. Another is the fact that Italy was admitted to the currency union despite a public debt level twice that permitted by the Maastricht criteria.

Despite such lapses, the fetish for rules continued after the crisis broke. National and EU leaders responded to the events of 2010-2012 with a cavalcade of new legal measures including a reinforcement of the SGP via a new fiscal compact and the introduction of a budgetary supervision regime overseen by the Commission.

The latter procedure – and its effectiveness – has been in the spotlight in recent weeks. On 28 October the outgoing European Commission gave its verdict on euro area states’ budgets, provisionally approving all 18 after France and Italy responded to earlier criticism by promising further deficit reduction measures. The result, therefore, is a compromise. For the time being, France and Italy avoid penalties for ‘serious non-compliance’ with the EU’s budgetary rules (the Commission will release more detailed formal opinions on member states’ budgets in November), even though they are still not fully compliant. For its part, the EU executive hopes that it has secured enough concessions to deflect accusations that the eurozone’s second and third largest economies are receiving preferential treatment, especially compared to those smaller countries – Greece, Portugal and Ireland – that were forced to implement harsh austerity measures as part of official bailouts.

The budget review process was thus illustrative of the complex interplay between politics and law, sombre technocracy and high-stakes theatre that characterises post-crisis eurozone governance. Both the French and Italian governments provided a good deal of the theatre. French finance minister Michel Sapin’s dramatic announcement in September that the country was unilaterally abandoning its commitment to cut its budget deficit to 3% by 2015 was an open challenge to the authority of the EU institutions and the hegemony of German-favoured austerity politics. It was also well-timed – coinciding with the announcement of Sapin’s predecessor, Pierre Moscovici, as the nominee for economic affairs commissioner in the incoming administration.

The ostensibly pro-European government in Rome has also been questioning the validity of rules (or, at least, the priorities they enshrine) that all euro states subscribed to not so long ago. The first draft of the country’s 2015 budget, submitted to the Commission on October 15, projected a deficit of 2.9%; just below the 3% limit, but higher than this year’s, thereby slowing reduction of Italy’s very high public debt and taking the country off the path required to meet its medium-term EU-negotiated targets. Perhaps unsurprisingly, the draft budget elicited a stern response from the European Commission in the form of a letter from outgoing economic affairs commissioner Jyrki Katainen to Italian finance minister, Pier Carlo Padoan, expressing concern at Italy's deviation from its agreed path and requesting an explanation for its non-compliance with its obligations. The October 22 letter, marked ‘strictly confidential’, was then posted on the finance ministry’s website. This provocation blindsided the Commission, further souring relations between Prime Minister Matteo Renzi and outgoing President Jose Manuel Barosso, who had become more openly critical of Italy’s failure to fully embrace structure reforms towards the end of his tenure. 

Meanwhile, budgets are also proving a contentious topic on the EU’s western periphery. At a summit on 23-24 October, British Prime Minister David Cameron clashed with the Commission over the revised bill for the UK’s contribution to the EU budget – an extra £1.7 billion (€2.1 billion) due by 1 December. Cameron was apparently taken by surprise by the figure, and so too was the Commission by the vehemence of his response. What the latter regarded as a fairly straightforward and technical accounting exercise (the UK’s higher total was based on a recalculation of Gross National Income (GNI) that was applied to all member states, resulting in some having to pay extra and some being entitled to refunds) was framed by the Prime Minister as a punishment for his country’s economic success. Having vowed not to pay the additional amount in full (and after having very publicly failed to secure other EU-related goals, such as blocking Jean-Claude Juncker’s nomination as Commission President), Cameron really needs to win some concessions from his European partners in order to retain credibility at home in the face of mounting euroscepticism.

So far, his fellow national leaders appear largely unsympathetic. At a press conference following the contentious summit, French President Francois Hollande insisted, somewhat ironically, that all states must respect the rules. Actually, member states were not always forced to play by the rules in the past and we are yet to see whether the crisis has really changed anything, though it would go some way to asserting the truth of Hollande’s claim if his government is denied another two-year extension of its deficit target later this month.

At any rate, both the review of euro area national budgets and the revised assessment of member state contributions indicate the extent to which rules in the European Union – their creation, application and contravention – are politicised. This trend has only escalated since the onset of the crisis. The bypassing of the ‘Community method’ and the decision-making dominance of the European Council (and its most powerful members) has made more visible the long shadow that politics casts over law in a union constituted by states that still retain considerable sovereign powers.

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