In setting the implementation rules and through individual decisions the European Commission has extensively used discretionary powers to reduce the adjustment requirements. It thus did not give the necessary importance to reaching the main objective of the preventive arm regulation, says the European Court of Auditors. This is of particular concern in cases of several Member States with high debt ratios which might trigger market concerns about their fiscal sustainability in the next recession.
The Stability and Growth Pact (SGP) is a set of rules designed to ensure that EU Member States pursue sound public finances and coordinate their fiscal policies, given that a fiscal crisis in one Member State could cause problems for others. The SGP consists of two parts: (1) the well-known “corrective arm” or Excessive Deficit Procedure (EDP), which focuses on bringing the headline deficits below 3 % of GDP, and (2) a less well-known “preventive arm”, which requires Member States to bring their structural budget balances (i.e. those excluding the effects of business cycles) into line with country-specific targets known as “Medium Term Objectives” (MTOs).
The main aim of the preventive arm regulation is that Member States should make reasonably rapid convergence towards these MTOs. Once the MTO has been reached, this would ensure two things: (1) that Member States have room for manoeuvre during recessions and (2) that debt ratios in highly indebted Member States decrease toward the ceiling set in the Treaty. However, the implementation rules and precedents set by the Commission do not ensure that these objectives are met within a reasonable timeframe, even in normal economic conditions.
“The flexibility provisions introduced by the Commission are not time-bound to the crisis period and in fact went too far in practice“, said Neven Mates, the member of the European Court of Auditors responsible for the report. “As a result, in the period of recovery and expansion (2014-2018), structural balances in several highly indebted countries have either diverged from their MTOs or converged to them at a slow pace that substantial improvement ahead of the next recession is far from being assured.”