European Union – ”Fiscal Discipline”

 

 

When it comes to fiscal discipline in the European Union, three is the magic number. That’s a deficit limit of 3 percent of GDP, and five EU states will make the budgetary bad books this year by breaching that level, according to economists.

These five — the U.K., France, Spain, Greece, and Croatia — include three of Europe’s five largest economies. Three more countries — Finland, Poland, and Romania — are seen posting deficits at the threshold.

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The EU dictates that governments must narrow budget deficits to within 3 percent of GDP and reduce debt to 60 percent of GDP, or face fines (though none have ever been applied despite consistent breaches). Since the Stability and Growth Pact came about in 1998 to strengthen the monitoring of budgets, 25 of the EU’s 28 members have overstepped the deficit limit. Sweden, Estonia and Luxembourg are the only countries that have avoided breaching it.The 2008 financial crisis is largely to blame for this poor track record, as governments rolled out aggressive stimulus programs. The EU went from two member violations in 2007 (Greece and Hungary) to 22 in 2009, including fiscal conservatives such as Germany and Austria. Over that period, the average deficit for the EU rose to 6.7 percent of GDP from just 0.9 percent. In 2010, Ireland set the individual record with a staggering 32.3% gap, according to European Commission data. French Finance Minister Michel Sapin said he expects the deficit to be back in line by the new deadline, though the latest Bloomberg survey is not so optimistic. Economists forecast a 3.2 percent deficit next year, decreasing to 3 percent in 2018. Besides France, only Croatia is still expected to be in breach next year after emerging from a six-year recession. Spain will post a 2.8 percent deficit, followed by Greece at 2.4 percent and the U.K. at 2.2 percent.

 

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J.Mason ♦ 

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