Rather subdued though the announcements were the proposals for the ‘revamping’ of the failed Stability and Growth Pact (SGP) deserve mention. Negotiations and discussions among the EU Finance Ministers have already begun and will doubtless go on for several months.
The proposals have generally been both welcomed and commended: that the old pact did not work in practice was a problem which certainly needed addressing. In a recent economic research paper, the European economists at Morgan Stanley put it bluntly: “In its original version, the SGP was ineffective, providing no incentive to save in good times, and forcing pro-cyclical policy measures in bad times.”
As we know, the 60% debt to GDP and 3% deficit to GDP ceilings remain in place and the stated aim of the reforms is to “introduce more economic rationale in the implementation of the SGP while strengthening surveillance and enforcement”. So far so good. But the audience is fairly sceptical and the consensus seems to be a very guarded nod of approval.
At Deutsche Bank Research, the team argue, “It is a positive move to formally acknowledge the failings of the (old) SGP and look for a more flexible and especially a more forward looking approach. And the proposed independent supervision would emphasise long-term budgeting, ensuring surpluses in good times to prepare for periods of slow growth and also longer term issues such as ageing populations.
“However, the proposals mainly formalise what has already happened so far. The new measures appear to allow bigger country deficits during hard economic times or to help a country implementing structural reforms. In other words the proposals represent a formalising of the pragmatic approach applied to Germany and France, the two biggest transgressors of the SGP limits. And it is reasonable to expect that a system which introduces more flexibility and thus greater discretion, will reduce the present level of simplicity and transparency in the rules as they currently stand.
Others, like Morgan Stanley, are more wary still. Although they approve of the move, describing them as a move in the right direction, they foresee a lengthy and uncertain debate amongst the whole of the EU membership – and not just the EMU members. It seems highly likely that the 10 new members of the EU, who have all expressed a desire to join the EMU, will want to have a say in the rules of that “EMU club”. And don’t expect the eurosceptic UK to stay quiet either!
“Be prepared for some bitter exchanges between finance ministers, the EC and the European Central Bank.” Although the proposal is currently too broad to be drawing any definite conclusions on the specific topics. “The road to a functioning fiscal policy framework appears long and tortuous, a recipe for higher volatility in government bond markets,” warns Morgan Stanley.