The Eternal Crisis
Breaking: Eurozone Still a Mess

The European Union’s finance ministers have formally stated that Spain and Portugal violated the budget deficit rules for the Eurozone in 2015. The Wall Street Journal reports:

The ministers’ decision, reached at their monthly gathering, endorses a ruling made by the European Commission—the EU’s executive arm—last week. It also marks the end of a protracted saga that has seen countless back-and-forths between Brussels, Lisbon and Madrid, triggering a broader debate across the bloc on whether the recently tightened rules can survive in times of crises.

Spain and Portugal now have 10 days to appeal the decision, and the commission has 20 days to recommend sanctions.

Tuesday’s decision marks the first time the sanctions procedure has been triggered since the rules were updated in response to the latest financial crisis.

This is how the rules were supposed to work:

The EU introduced stricter fiscal rules for countries using the euro in 2013 as a response to the sovereign-debt crisis, which had put the future of the eurozone into doubt. The main goal of the rules is to keep public debt in check.

Under these rules governments have to bring their deficits to below 3% of gross domestic product, while debts shouldn’t be higher than 60% of GDP.

And this is how they will actually work:

But top EU officials have indicated the sanctions are likely to be symbolically set at zero, in a sign that there is little appetite across the bloc to punish the two countries and amid concerns that such a move would be counterproductive at a time of economic uncertainty.[..]

The commission can impose fines of up to 0.2% of gross domestic product and must also propose that some of the EU funding committed for the countries for next year is temporarily blocked.

But it can recommend a small fine, or even no fine at all, something EU officials see as the likeliest route. It can do so either on the grounds of exceptional economic circumstances or after the countries have appealed the decision.[..]

Spanish Finance Minister Luis de Guindos said he expected the sanction to be zero, arguing it would be illogical to punish a country that has followed the policy advice of eurozone authorities in order to shift from a recession to growth.

It would be difficult for the Europeans to bring down the hammer too hard. For one thing, it’s rather hard to do that a few weeks after your President said that they would let France get away with breaking the fiscal rules “because it is France.” More seriously, the great and good of Europe are terrified of stoking any further populist backlash; in the south, fiscal leniency is popular and punishment in service of German-style restriction would stoke exactly that.

This can’t be told as a simple case of profligate southerners versus economically sound northerners: the Spanish plausibly argue that they were following the advice of leading economists to improve their economy. It’s also worth noting that the Spaniards and Portuguese have very different pleas here:

Spain has struggled to meet its budget deficit targets over the past few years despite robust economic growth. Last year, with the economy expanding 3.2%, Spain reported a budget gap of 5.1% of GDP. The commission had set a target of 4.2%.

Portugal has sharply cut its budget deficit from close to 10% of GDP in 2010 to 4.4% last year, but that still exceeded the bloc’s limit. Excluding a capital injection into a failed lender in December and smaller one-time items, Portugal’s 2015 deficit would have been slightly over the 3% limit.

Rather, what this flags up is that, nearly a decade after the euro crisis started, Europe still hasn’t figured out how to make the euro work as a cohesive currency. Despite the happy talk about how the Germans are more tolerant of European Central Bank measures these days, it’s still run more or less as if it were the Deutschmark, but distributed to nations that need the lira. Fiscal transfers are still a distant dream, and as this story shows, so is fiscal discipline. And so, unable to go forward but unable to back out, the eurozone will limp on until the next crisis.

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