28 Jul 2016

The second death of the Stability Pact and the birth of an inter-governmental Europe

Daniel Gros


Author: Daniel Gros

Series: CEPS Commentary

When the economic governance mechanisms were revised some years ago, it was decided to tighten the rules against excessive deficits, empowering the Commission with the right to propose fines of up to 0.2% of GDP on any Member State that had failed in its obligation to reduce its fiscal deficit and to bring it gradually back down, to below 3% of GDP. Portugal and Spain had clearly not done so last year. Any proposal by the Commission to impose a fine would have been final unless the Finance Ministers were able to muster a 2/3 majority against the proposal.

But on July 27th, the Commission decided to ‘cancel’ the fine against both countries. This was a surprise, especially in the case of Spain, since the overshot there had been large, of about 1% of GDP. 

Another surprise were the reports, not contradicted by Berlin, that the German Finance Minister, Wolfgang Schäuble, had personally lobbied several Commissioners not to impose fines.

Taken together, these two developments mean that the Stability Pact has died a second time.

The first time was in 2003, when all three large euro-area countries (Germany, France and Italy) were running deficits above the 3% of GDP reference value. By the end of 2003, it became clear that especially France and Germany (then with record unemployment) were not living up to the commitments on deficit reduction they had made earlier. The Commission proposed therefore to ratchet up the excessive deficit procedure, going to the last stage before a fine could be imposed. This was of course strenuously opposed by the German government under Chancellor Gerhard Schröder. However, in stark contrast with its behaviour yesterday, the Commission remained united, despite the pressure from three large member countries. The Commission’s proposal was subsequently voted down in Ecofin, but not before the Commission had forcefully made the point that it took its responsibility seriously as guardian of the treaties and their rules.

But this time was different. The Commission was already riven by internal disagreement on the issue, with some Commissioners predisposed to favour a politically motivated leniency over the strict application of rules. The intervention by Schäuble then made the difference. 

Moreover, the decision to cancel the fine was clearly motivated by political reasoning. The message is thus clear: rules can be bent when it is politically convenient. This episode will thus have wider ramifications. First of all, the entire economic governance structure for the euro area has become meaningless. No member state can now reasonably be asked to undertake any economic measure that the government in charge (if there is one at all) judges is against its political interests at that moment. 

Moreover, we now know what it means to have a ‘political’ Commission. It has abdicated its traditional role as guardian of the treaties. It will now face great difficulties in defending EU rules in many other cases as well. The next test is already under way: should the Commission impose state aid and bail-in rules in the case of the Italian Bank Monte dei Paschi di Siena, which would also be highly politically inconvenient for the Italian government?    

The Commission plays a central role in the European construction. Without an impartial guardian of the treaties, the Community method cannot work. The European Union risks becoming a loose framework in which Member States fight for their own, short-term, political interests. And in this free for all, there will be no winners.

Daniel Gros is Director of CEPS.

CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The views expressed are attributable only to the author in a personal capacity and not to any institution with which he is associated.

© CEPS 2016