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26 April 2011

Economic governance: MEPs demand tougher sanctions for excessive deficits


The approved texts give a stronger legal backing to the European economic semester, some elements of the Euro Pact, and the National Reform Programme (NRP) procedures.

Despite an encouraging, but fragile, recovery in the past couple of months, MEPs haven't lost sight of the continuing economic and social hardship in the European Union. On 19 April, MEPs from the Economic Committee backed a legislative package introducing tougher sanctions to address the root causes of the crisis: a worrying build-up of economic imbalances within European economies and the propensity of governments to finance spending by getting deeper into debt.

MEPs tabled over 2,000 amendments to the six legislative proposals in the European Commission's economic governance package, calling for a tougher regime to deal with spendthrift member states than that proposed by the Commission. The main points are:

• the Commission should have a more important role in the surveillance of, and decisions on, excessive deficits vis-à-vis the Council, so that member states have less room for manoeuvre;
• countries caught cooking their accounts (reporting false statistics on debt etc.) should face a fine of 0.5% of GDP; 
• sanctions for failing to take action on macroeconomic imbalances (0.1% GDP) should kick in earlier, at the first failure to respect recommendations. If failure is persistent, a fine could be increased to 0.3% of GDP;
• Council votes on imposing deposits and fines should be held in public, except in crisis situations, when decisions can be taken behind closed doors.
 
MEPs also demand that the Commission allows member states to continue making investments that would be beneficial to their long-term health. There is a fear among MEPs that growth and jobs are being left out of the recent legislative packages. Quite a few MEPs have warned that cutting deficits in the face of recession might prolong and deepen it.

 
The approved texts also give a stronger legal backing to the European economic semester, some elements of the Euro Pact, and the National Reform Programme (NRP) procedures.
 
Diagnosis: crisis as a consequence of economic imbalances, exploding debt

 
Two complementary problems are seen as being at the root of Europe's economic crisis - reckless government spending and economic imbalances - and both can lead to the EU having to step in with emergency loans.
 
An example of the first case is Greek government spending. To finance spending on wages, investment and social services in excess of tax revenue, the government ran a deficit and borrowed money from banks. When the banks began to fear loans might not be repaid because of high levels of public debt and recession, they cut back lending and the EU had to step in with emergency loans.

Economic imbalances arise because some countries like Germany have large trade surpluses, while others like Greece and Portugal have large trade deficits. This leads the private sector in countries with a deficit to borrow from countries with a surplus to finance for example a real estate bubble (like those seen in Ireland and Spain). When the bubble bursts, government steps in to save the banks hiking up public debt.
 
Remedy: curb imbalances, sanction excessive spending

Of the six economic governance proposals, four deal with deficits and debt (reinforcing the existing Stability and Growth Pact), and the other two break new ground, introducing surveillance of macroeconomic imbalances:

• strengthening the SGP through more focus on the public debt limit of 60% of gross domestic product. If it is above that, the government has to start reducing it, by 5% a year on average over three years. Until now the focus has been mainly on keeping deficits within 3% of GDP. In addition, the aim is to introduce semi-automatic sanctions for countries that fail to meet commitments on debt and deficit. Once proposed, sanctions (of between 0.2-0.5% of GDP) would only be rejected if a majority votes against them - at the moment sanctions require a majority in favour.  
• Curbing imbalances through surveillance of (as yet undecided) national indicators of imbalances and recommendations of action to reduce them. There would be sanctions for countries that failed to comply.

Press release

 


© European Parliament


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