Below is an excerpt from the new study, Discipline and Punish: End of the road for the EU’s Stability and Growth Pact?, commissioned by Martin Schirdewan MEP, co-president of the European United Left group in the European Parliament. Read the full study here.
Against a backdrop of prolonged stagnation and low growth, ultra-low interest rates, rising income and wealth inequality, and a desperate need for massive public investment in the climate transition, placing arbitrary restrictions on the borrowing and spending abilities of European governments cannot be economically or socially justified.
It is almost universally acknowledged that the Stability and Growth Pact (SGP) has failed to ensure either economic stability or growth in the European Union (EU) since its introduction in 1997. It has in fact demonstrably acted to stifle growth, and it has deepened and prolonged the double-dip recession in the EU. The strict fiscal rules have acted as a direct barrier to the recovery of economic growth to pre-crisis levels, and they contribute to the ongoing sluggish growth in the EU.
While the SGP was loosened due to political opposition to the rules from powerful member states in 2005, the post-crisis reforms of 2011 (the Six-Pack) and 2013 (the Two-Pack and the Fiscal Compact inter-governmental treaty) dramatically increased the power of the European Commission over the budgetary decisions of member states. These changes strengthened the fiscal rules but weakened the democratic decision-making process.
The content of the SGP, and the Maastricht Treaty (1992) convergence criteria it was based on, reflect the dominant economic ideology of the 1990s, as well as reflecting the general economic conditions that prevailed at the time. The numerical ceilings of the SGP – that EU member states must keep their budget deficits below 3 per cent of GDP, and public debt to GDP ratios below 60 per cent – may have been based on the prevailing standards of 1997 in the EU, but neither threshold has any sound economic basis.
Transferring wealth from labour to capital
Fiscal policy is one of the most important ways a state has to redistribute wealth and contain or reduce income and wealth inequality. The constraints imposed by the SGP have directly limited states’ ability to redistribute wealth. While moves have been made to exempt certain forms of investment from the rules (i.e, national contributions to European Fund for Strategic Investment projects) on the grounds that such investments will generate GDP growth, direct transfers of resources through expenditure on welfare programmes and public services are threatened by the SGP.
The SGP actively promotes the transfer of wealth from labour to capital, a process that has intensified through the Macroeconomic Imbalance Procedure introduced as part of the Six-Pack. The specific policy measures demanded by the Commission focus on limiting wage growth; increasing the threshold age for receiving a pension; privatising state-owned enterprises and healthcare; promoting longer working hours; demanding a reduction in job security; and cutting funds to social services.
An analysis of the country-specific recommendations under the SGP and the Macroeconomic Imbalance Procedure since 2011 finds that in addition to consistent demands for reductions in public spending, the Commission has specifically singled out pensions, healthcare provision, wage growth, job security and unemployment benefits for attack.
The content of Country-Specific Recommendations from the Commission under the Stability and Growth Pact and the Macroeconomic Imbalance Procedure 2011-2018
NUMBER OF EU28 MEMBER STATES RECEIVING INSTRUCTION FROM COMMISSION
|YEAR||Increasing pension age/
cuts to pension funding
|Spending cuts on healthcare/
privatisation of healthcare
|Suppression of wage growth||Reducing job security/
workers’ bargaining rights
for unemployed, vulnerable or people with disabilities
Source: Author’s calculation based on Commission CSR data 2011-2018
Under the cover of limiting debt and deficits, the European Commission is enforcing austerity in policy areas it has no legal authority over.
From the introduction of the European Semester in 2011 to 2018, the Commission made 105 separate demands of individual member states to raise the statutory retirement age and/or reduce public spending on pensions and aged care.
It made 63 demands that governments cut spending on healthcare and/or outsource or privatise health services.
Demands aimed at suppressing wage growth were put to member states on 50 occasions, while instructions aimed at reducing job security, employment protections against dismissal, and the collective bargaining rights of workers and trade unions were made 38 times.
In addition to routine demands to cut government expenditure on social services generally, the Commission also made 45 specific demands aimed at reducing or removing benefits for the unemployed, vulnerable people and people with disabilities, including by enacting punitive measures to force these individuals into the labour market – or, at least into becoming jobseekers.
The SGP’s flawed ideology and methodology
The architects of the euro were aware of the many “spillover” effects that imbalances in one economy can have on others in a currency union. However, the EU institutions have focused single-mindedly on pursuing internal devaluation and reducing “wage rigidities”. The deflationary impact of a state or states running a large current account surplus has been largely ignored.
The economic justification for the EU’s pre- and post-crisis austerity policies is based on the fringe theory of “expansionary austerity” that has been decisively disproved.
The calculation of the structural deficit (the discretionary spending by a government minus cyclical factors) that is used to determine whether a state is breaching the 3 per cent deficit target since the introduction of the Six-Pack is highly contested. The fact that the structural deficit is “unobservable” has led to bizarre situations such as the Excessive Deficit Procedure the Commission opened against Italy in 2018 in fear that the stagnant Italian economy was at risk of overheating.
The question of public debt
The average public debt to GDP ratio in the EU has expanded from an average of around 65-70 per cent in 1997 to 80.4 per cent in 2018. Eurozone debt was lower than the EU average in 1997, but this trend has now been reversed. Eurozone public debt peaked at 93.0 per cent in 2014 and declined to 86.1 per cent in 2018.
Public debt is not inherently “good” or “bad”. The literature claiming that once a certain threshold of public debt has been reached (90-100 per cent of GDP), the GDP growth rate will decline, is inconclusive and disputed. The level of debt is not as important so long as the state is able to continue rolling over and servicing its debt. In the current context of prolonged ultra-low interest rates, there is little to no cost to borrowing.
The precise scenario the SGP was supposed to prevent – a contagious sovereign debt crisis within the economic and monetary union – unfolded following the global financial crisis.
The key factors behind the surge in the public debt levels in the “peripheral” member states after 2008 were: (1) the policies of the EU institutions and member states in organising a coordinated rescue of the financial sector, socialising massive levels of private debt; (2) the ECB’s actions in failing to intervene to provide credit to the crisis-affected states for an extended period of time, causing the market borrowing costs for these states to surge; and (3) the contractionary austerity programmes imposed by the Troika.
At the same time as limiting public investment and expenditure, the EU facilitates massive levels of tax avoidance by multinational corporations that further deny governments’ access to vitally needed revenue. The system whereby individual member states of the EU, several of which are recognised internationally as tax havens, are allowed to veto proposals for effective action to combat tax avoidance enables this situation.
Politicised enforcement of the fiscal rules
Almost all EU member states have breached the rules at some point – during the Great Recession only Luxembourg did not go over the 3 per cent deficit benchmark. Only Estonia and Sweden have escaped the Excessive Deficit Procedure under the SGP.
The examples of the high-profile clashes between member states and the Commission regarding the application of the Excessive Deficit Procedure under the SGP demonstrate the arbitrary, biased and highly political enforcement of the rules in practice. The powerful and compliant are rewarded, while the weaker member states and dissenters are punished. The cases of Germany, France, Spain, Portugal and Italy are used here to demonstrate the disparity in the application of the rules.
The inconsistent, biased and secretive decision-making process under the SGP is perhaps the most glaring symbol of the EU’s democratic deficit, significantly undermining public confidence in the EU.
A Left perspective on fiscal strategy
The SGP is currently facing unprecedented criticism from member states, EU institutions such as the European Central Bank, European Court of auditors and European Fiscal Board, and international institutions including the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD). The forthcoming review of the SGP by the Commission that will take place throughout 2020 is an important opportunity to put forward political demands regarding the fiscal rules.
Proposals for reform such as excluding green investment or public investment in general, and simplifying the rules, are welcome, but insufficient. The necessary climate transition is impossible under the SGP. Decisions on borrowing and spending must be decentralised to accountable national parliaments.
The EU needs a major, coordinated public investment effort in order to radically transform our economies and societies to meet the challenges of climate change, digitalisation and growing inequality.