SANCTIONING COUNTRIES IN A POST-BREXIT WORLD?
The Debated Cases of Sanctions on Spain and Portugal
The Commission initiated the process to impose sanctions (up to 0.2% of GDP and to a freeze of structural funds for next year) on Spain and Portugal under the excessive deficit procedure, as reported by EuroIntelligence and el mundo—as neither country took "effective" measures to reduce its deficit in 2013-15, though the Commissioner left the door open not to impose any fine (see the Press release and the Factsheet). The Council will have to endorse the EC’s recommendation to establish the absence of corrective action (by qualified majority). If affirmed, the Commission is legally obliged to present within 20 days a proposal for a fine (0.2 percent of GDP). It must also propose a suspension of part of the commitments of EU Structural and Investment Funds (ESIF). The Ecofin meeting (July 12, agenda) confirmed that Spain and Portugal were in breach of fiscal rules, giving the countries 10-days to persuade the EC they should not be fined. The Commission has 20 days to decide on fines and sanctions for the two countries, though analysts expect little or no fines given the minimal upside for such action. The eurogroup (ahead of today’s Ecofin) generally concluded against sanctions, according to EuroIntelligence and the Commission appears to seek ‘intelligent’ sanctions against Spain and Portugal, to combine credibility and intelligence, as reported by Politico. But analysts are waiting for the fine print, the additional policy conditionality that will be required (see Jornal de Negocios and El País).
Portugal is once again under close market scrutiny as noted by Barclays, due to concerns about a systemic banking crisis, the lack of a convincing medium-term fiscal plan and excessive public and private sector leverage—raising the questions of whether another program is needed. Barclays sees at least three critical conditions: (i) the ECB continues with its QE program for the foreseeable future; (ii) DBRS does not downgrade Portugal; (iii) no major crisis emerges in Italy or Spain.
The Broader View: Failing Economic Policy Coordination?
Implementation of economic policy recommendations is weak. In the context of the European Semester, it was modest in 2011 and deteriorated since, according to a study by Zsolt Darvas and Alvaro Leandro (Bruegel). The European Semester is supposed to improve economic policy coordination and implementation of economic rules, such as the Stability and Growth Pact (SGP) and the Macroeconomic Imbalance Procedure (MIP)—with country-specific recommendations (CSRs) regarding budgetary and economic policies for each EU country not under financial assistance, as well as for the euro area as a whole. Darvas and Leandro computed an implementation index (à la Deroose and Griesse) that shows continued deterioration, which they argue is due to governments’ focus on national interests (see an earlier paper). Implementation has also raised concerns of special treatment to the largest members of the EU and lack of objectivity, for example by Dutch finance minister and ECOFIN Chair Jeroen Dijsselbloem (statement 1 and 2, and hearing at the European Parliament).
The SGP, ineffective by decisions of the European Commission? The May 2016 decisions on the CSRs (see the Press release, Fact sheet, and Individual country documents) were criticized for failing to apply the SGP effectively, according to EuroIntelligence—streamlining of the CSRs for 2016 and no stepping up of the MIP, granting fiscal flexibility to Italy (0.85% of GDP), giving Spain and Portugal one additional year to bring their deficits below 3 percent of GDP and postponing sanctions/fines (El País and Politico) to avoid interference with the Spanish elections in June, which some, like Werner Mussler (hat-tip EuroIntelligence), consider as the abandonment of fiscal policy co-ordination and a loss in the credibility of the European Commission as guardian of the European Treaties. Despite this, Citi predicted that political tensions between the Commission and Italy would escalate, that a move for more austerity in Portugal could well shake the fragile political stability of the Socialist-led minority government, and would burden the new administration in Spain with tensions over budgetary compliance.
What solution? The role of a central budget, to avoid problematic sanctions. For EuroIntelligence, the SGP is too static to work as a policy regime for sovereign states and a central budget is the only way to impose fiscal restraint on member states is to create a central budget. Otherwise, fiscal divergence will happen. Imposing fines on sovereign countries is problematic, especially given that there is no good (political) timing for it. As argued last month in another EuroIntelligence 1 entry, the inability to co-ordinate sovereign electorates is the consequence of a decentralised monetary union: monetary unions without fiscal transfers have no mechanism to correct macroeconomic imbalances.
