EU finance rules – changes in the horizon

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by Joaquim Rocha, Professor at the Law School of University of Minho

The rules of the Stability and Growth Pact (SGP) for the European Union may yet again undergo some changes. The SGP — whose first version started being implemented in 1997 and since day one has been criticised for vagueness, complexity and juridical fragility — has gone through several amendments seeking to avoid infractions and deviations. Most recent revisions were related to excessive deficit situations into which a number of Member States have been dragged (including Portugal). Following political blockages and negotiation impasses, those revisions were taken to an “extra-Union” solution (conventional/classic international law) via the so-called Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

At this time, a solution within the EU law framework is pursued. The idea aims to simplify the rules and make them easily manageable by policymakers, public authorities, politicians in general, namely those accountable in the finances. The major line of action revolves around the introduction of a public expenditure’s control index. Simply put, the goal of the financial mechanisms would be transferred from cutting deficit in general to imposing an expenditure limit to the States, which could not override the growth rates of the economy in the mid-term.

It should be a virtuous solution as the fiscal focus has been kept on income, loans and taxes for too long, mistakenly discrediting and setting aside the essential cornerstone of finances: the expenditure.

According to the President of the Eurogroup, Jeroen Dijsselbloem, “We did not discuss how to change the Pact, just how to choose the indicators to assess the compliance with the Pact. (…) It is directly in the hands of finance ministers. It gives us more guidance in the process of designing the budget. It says in advance what you have to do, and you have the control in your hands. There was general agreement that we need an indicator that takes out all the cyclical elements and one-offs but preferably it should be more stable and not change all the time, and we could put more emphasis on indicators that we can actually directly influence as finance ministers“, via Reuters.

On the matter, the Vice President of the European Commission officially addressed after the informal ECOFIN:

Our intention is to focus more on what is really in the hands of the Ministers of Finance, namely the evolution of primary expenditure and new revenue measures. This does not mean that we will put aside the deficit and the debt objectives. It is rather about making it clear what governments are expected to do to achieve these objectives. There was I would say broad support to pursue the work in this direction.(…)  At the same time, we need to be realistic in our expectations, as many underlined that there is no perfect method of calculating the out-put gap, it will always be an approximation“, via European Commission Press Release.

The changes had been anticipated:

EU to consider single “expenditure rule” to cut through budget morass, via Reuters.

Picture credits: Money Scales  by Images Money.

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