Barking dogs don’t bite. The European Commission just released its so-called “country-specific recommendation” on fiscal and economic policies.
In layman terms these recommendations tell member states how to improve their fiscal positions, public finances and economic structure. Failure to follow up on the fiscal recommendations can eventually lead to sanctions. In the run-up to today’s announcement, most attention was on three countries: Italy, Spain and Portugal, where recent fiscal slippages had given rise to speculations about upcoming sanctions. In the end, the Commission spared all three countries, delaying the assessment of Portugal and Spain until July and granting Italy additional fiscal room for this year.
As regards Spain and Portugal, the Commission did mention that more measures were needed to reduce fiscal deficits but no decision was taken and the Commission would return to these issues in July. From a technical point, this makes sense as it will need a new government anyway to implement any possible Commission recommendations. At the same time, however, this decision also has a slight air of avoiding a political clash during the election campaign as Spanish prime-minister Rajoy has recently caught attention with promises to cut taxes after the elections. Italy can probably be regarded as the biggest winner of today’s announcement. Here, the Commission had to assess public finances as Italy’s government debt position is still clearly above the reference value (and the pace of reduction). The Commission concluded that the Italian government will be granted additional fiscal room of 0.85% of GDP for this year, basically matching the Italian government’s request.
While some commentators had expected the Commission to use the room provided by the latest revision of the fiscal rules and escalate the pressure on Portugal and Spain, the Commission in our view was wise enough to give priority to economic and political stability. Theoretically, the Commission could have enforced new austerity measures, eventually even with sanctions of up to 0.2% of GDP.
After today’s announcements, the European Commission will probably again be criticized for being too lax on the Eurozone’s fiscal rules. However, criticism of the Eurozone’s fiscal rules and the Stability and Growth Pact is as old as the rules themselves. Sometimes the rules were too strict and rigid, sometimes the European Commission was blamed to have buried the rules and to have given up its official role as guardian of the Treaties. Despite several overhauls over the last two decades, the Eurozone’s fiscal rules are still not able to please everyone. Moves from nominal to cyclically-adjusted targets, more focus on debt or more focus on actions taken, it is nearly impossible to construct fiscal rules that satisfy everyone at any time and any situation. At the current juncture, with most Eurozone countries desperately trying to revive growth and tackle unemployment, today’s decision was in our view the right decision. It is not always a bad thing if barking dogs don’t bite.