Neven Mates knows all about government debt. The Croatian economist spent 17 years at the International Monetary Fund before joining the European Court of Auditors in 2013. He was tasked this year with reviewing whether the European Stability and Growth Pact, a pillar of monetary union, was achieving its stated aim of lowering state debt in the euro-zone.
He presented his findings on Thursday and his sobering conclusion is: The 20-year-old pact has hardly had any effect. And furthermore, the European Commission – the EU’s 28-member executive cabinet – is largely to blame.
The Commission, his report said, has made “extensive” use of its leeway to reduce the fiscal policy requirements on highly-indebted members of the currency union. This generous interpretation of the stability pact posed a major risk because if the euro zone slides into a new recession, member states with high debt could come under enormous pressure in financial markets, the report said.
The lax approach towards implementing the pact could cause major problems for the 19-country euro zone, a point Mr. Mates made explicitly clear on Thursday.
However, the EU’s executive body has signaled it is not interested in the auditors’ advice. Ahead of Mr. Mates’ presentation, the Commissioner for Economic and Financial Affairs, Pierre Moscovici, said on Wednesday he didn’t want to comment on the opinion of “other EU institutions.” There was no need to make changes, he said. “This Commission respects the rules.”
Mr. Moscovici knows he has the backing of Commission President Jean-Claude Juncker, who declared right after he took office in January 2015 that he wanted to apply the stability pact more flexibly.
Italy, which has the second-highest government debt-to-GDP ratio in the euro zone after Greece, has been the main beneficiary of that approach. The Commission granted Italy more exemptions than any other member state, allowing it to subtract spending on investment, structural reform and the reconstruction of earthquake-hit regions from its cyclically-adjusted deficit.
But it’s not working. The Commission’s hopes that Italy would seize on this generosity to finally get its finances in shape were dashed. In fact, Italy’s new populist government wants to increase the budget deficit and government debt. But Mr. Moscovici doesn’t see that as cause for alarm. “Stop constantly whipping up fear of Italy and Greece,” the Frenchman said on Wednesday.
So it doesn’t look as though the European auditors will get Mr. Moscovici to mend his ways. Mr. Mates wants to make six recommendations, said EU diplomats. They include calling on the Commission to apply the stability rules more strictly, for example by taking more rigorous measures when member states depart from their medium-term budget plans. He also wants the Commission to make greater use of the pact’s early warning system, the so-called “preventive arm,” than it has in the past.
This wouldn’t require any changes in the law, said the auditors. The pact and the directives attached to it already provide the EU with enough powers to ensure that member states stick to sensible fiscal policies.
The European Court of Auditors isn’t alone in its criticism of the Commission. The European Central Bank and the Bundesbank, Germany’s central bank, have repeatedly accused the EU’s executive body of being too soft, but it has studiously ignored them.
When Wolfgang Schäuble was Germany’s finance minister, he even threatened to remove the Commission’s budget-supervision powers – but all member states rejected that idea as too politically risky. The move would have required a change in EU treaties, with all the renegotiation and ratification that would have entailed.
But Mr. Schäuble’s threat wasn’t completely ineffective because the euro nations now plan to strengthen the euro-zone’s rescue fund, the European Stability Mechanism (ESM), by putting it in charge of devising reform programs and of making sure that countries stick to bailout conditions. That means the ESM will in future closely monitor the budgets of all highly-indebted countries.
ESM chief Klaus Regling keeps stressing that he has no intention of interfering with the EU Commission. But upgrading the ESM could end up weakening the Commission. Germany, but also other countries like the Netherlands and Finland, have lost faith in the Commission’s budgetary control.
Ruth Berschens is Handelsblatt’s bureau chief in Brussels. David Crossland adapted this story into English for Handelsblatt Global. To contact the author: email@example.com.