Economy

Cantillon: golden rule for Europe is to keep it as simple as possible

The EU’s fiscal regulations can be a minefield and create more questions than answers

If “wholesale treaty changes” are needed to implement a fiscal overhaul, would any member state, including Ireland, want to hold another referendum?

Sat May 30 2015 - 01:00

The IMF’s plea for simpler fiscal rules in Europe makes sense. Dizzying in their technical complexity and fiendishly arcane by operation, the rules are a mystery. Compliance and enforcement are “fairly weak”, says the IMF. Better to refine the framework to make it more robust and more readily understandable.

The IMF seeks a new two-pillar system. With the debt-to-GDP ratio its fiscal anchor, the system would enforce a single operational rule in respect of expenditure growth and possibly an explicit debt correction mechanism. The aim, of course, is to prevent the build-up of fiscal imbalances and support fiscal and macroeconomic sustainability.

That’s all for the good, though slippery questions arise. These centre on the execution of regime change and on the execution of the rules themselves.

As the IMF makes clear, certain elements of the overhaul may face legal obstacles. It also warns that “wholesale treaty changes” may be required. To say the political classes right around Europe are not quite enthused at this kind of thing is to put it mildly. Another Irish referendum? Moreover, Ireland is far from the only member state with an aversion to re-opening European treaties. Political considerations abound.

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Then there is the practical application of such rules. The IMF calls for greater automaticity in enforcement, a more credible set of sanctions for errant member states and better co-ordination of fiscal policy monitoring.

In theory that all sounds wonderful. But political considerations arise here too also – and more to the point, they arise in the heat of political real-time.

One of the prime bugbears in talks on the current rules was resistance to anything approaching automatic sanctions. This led to semi-automatic sanctions – and inevitable parallels with weaponry. Compliance also remains weak. France received a reprieve from Brussels in February on its deficit targets, its third such reprieve.

No surprise. But would the major EU powers have it any other way?

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