Germany and the Netherlands are encouraged to spend more under plans for ‘positive fiscal stance.’

Author: Florian Eder

Posted: 16/11/2016

The European Commission on Wednesday signaled a shift away from austerity and pledged to pursue a “positive fiscal stance” for the eurozone.

On the same day that it told eight governments that their national budgets were “at risk of non compliance” with the EU’s rules, the Commission set out moves toward a more expansive fiscal policy, indicating its ambition to steer the eurozone’s fiscal policies rather than merely monitor how countries are performing.

Supporters of keeping a close watch on spendthrift governments in the eurozone criticized Brussels’ plans — which gave capitals an additional fiscal leeway of 0.5 percent of economic output in 2017 — calling them “highly dangerous.” Under the EU’s Stability and Growth Pact, euro countries are supposed to keep budget deficits no higher than 3 percent of GDP and public debt under 60 percent of GDP.

“The rules of the Stability and Growth Pact [still] apply,” said Markus Ferber, a German conservative MEP and member of the Parliament’s economic and monetary affairs committee. “As long as these are not fulfilled, there is no room for expansive fiscal policy at all. I consider this communication to be highly dangerous because it provides the eternal deficit sinners such as Italy and France with just another pretext for shaking the foundation of the Stability and Growth Pact.”

The Commission denied it was bending to pressure, particularly from Italy’s Prime Minister Matteo Renzi, to lay off austerity. Renzi faces a difficult referendum fight next month on a constitutional amendment, which polls suggest his government would lose, likely forcing his resignation.

Explaining the shift by Brussels, Pierre Moscovici, the economic and financial affairs commissioner, said the Commission wanted to move away from “statistical aggregation” and toward acting as “the eurozone’s finance minister.”

“What we want to do today is to replace contingency with political will, in full respect of our rules,” the French commissioner said.

The proposal means that countries with “a budgetary margin” will be invited “to spend and invest,” while those who haven’t met their budgetary targets “need to focus on respecting the rules.”

The recommendation names Germany and the Netherlands as two countries that should splash the cash. According to a simulation exercise carried out by the Commission, “additional government investment of 1 percent of GDP in Germany and the Netherlands, sustained over 10 years, could raise domestic GDP by 1.1 and 0.9 percent, respectively” with a continuation of low interest and inflation rates.

A call for a “positive aggregate fiscal stance, of course … should take account of the Stability and Growth Pact,” said Commission Vice President Valdis Dombrovskis, adding that “quality is as important as quantity” when it comes to governments choosing what to spend their money on.

“There is a case for a moderately expansionary fiscal stance for the euro area at this point in time,” the Commission document says. “Such a fiscal expansion would correspond to an additional fiscal ‘stimulus’ of around €50 billion for the euro area as a whole in 2017.”

The Commission on Wednesday found eight countries “at risk of non compliance” on their budgets but it kicked a decision on whether to step up pressure on states to comply with the rules down the road.

On one of the budget offenders, Italy, the Commission will “come back with a report on debt rules shortly,” Dombrovskis said, indicating that it could be in “a month or two” — after the Italian referendum on December 4.

Source: http://www.politico.eu/article/brussels-does-the-full-keynes/