89 Connect Forums Economy & Finance The European labyrinth of budgetary rules and the Medium Term Objective

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      Institute of Public Policy - LisbonInstitute of Public Policy – Lisbon
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      By Paulo Trigo Pereira, Institute of Public Policy – Lisbon

      Where Europe would be expected to exist, it does not. A banking union would be expected to have a deposit guarantee scheme in place to avoid bank runs in a given country, as has happened in the past, but this component of the Banking Union has been postponed time and again. It would be desirable for the euro area to be based on a euro area budget that would fulfil a macroeconomic stabilisation function and could absorb symmetric and asymmetric shocks within it, but this budget does not exist despite the several public stances advocating for it. Everything that is essential and entails some risk sharing between European countries is postponed. There is not enough Europe in several dimensions of the institutional architecture of the euro area, resulting in its remaining vulnerability, which is only concealed by a period of (weak) European economic growth.

      On the other hand, there is too much Europe both as regards budgetary rules and subsidiarily in the unjustified and excessive interference by the Commission and the European Council in Member States’ budgetary policy. This paradox of simultaneously not having enough Europe in what is essential to face both systemic crises and shocks exclusively affecting certain countries, and having too much Europe in the excessive regulation and related bureaucracy, has led many citizens to move away from the European project, of which Brexit is merely an epiphenomenon.

      In particular, the complexity of the budgetary rules requires their decoding from the outset, as well as their implementation by a large bureaucracy of officials, both in the Commission and in Member States. Greater complexity means less transparency, lower rule comprehensibility, and less democratic accountability. Decisions that should be transparent and have political legitimacy, at national and European level, become unclear to citizens, and are often made without their knowledge, although they have a significant impact on their lives.

      The purpose of this article is not to discuss whether or not the whole set of budgetary rules is reasonable in the context of the Economic and Monetary Union, which is something that needs to be done, but not within the scope of this article.1 It exclusively aims to show the complexity of the rules currently in place, to clarify the existing information on those rules and how the Commission and the Council go beyond what is laid down in the European Union Treaties and Regulations, in an interpretation that in practice introduces additional discretionary rules outside national political and public scrutiny. The specific case we will be addressing is the “medium-term objective” (MTO) for Member States’ public finances, which has a duration of three years, and which is, at the beginning of 2019, being assessed by the European Commission (ECFIN) in conjunction with the various governments.

      The relevance of this subject lies on the fact that the MTO, which is now being analysed and discussed between the European institutions and Portugal, will limit the Portuguese budgetary policy for the 2020-22 triennium, which will have its practical expression in the next Stability Programme to be submitted by the Government to the Assembly of the Republic and the European Commission in April 2019. Keeping the current MTO at +0.25% of potential GDP or lowering it to -0.5%, the value laid down in the TSCG, makes all the difference: it amounts to about EUR 1 500 million more each year in the (structural) budget balance, which means one of three things: (i) that the tax revenue could be lower by EUR 1.5 M, (ii) that public expenditure could be EUR 1.5 M higher or (iii) a combination of revenue reduction and expenditure increases with an aggregate effect of EUR 1.5 M.2 While the general government budget balance is only a global constraint on budgetary policy, it is ultimately very relevant in policy options, especially after a period of severe austerity (2011-14), followed by a period of necessary restraint in public finances (2015-19).

      Essentially, the questions we wish to answer are the following: Is there a clear coordination between budgetary rules or are we before a “labyrinth”? What is the legal force of the ‘Medium-Term Objective’ set for each country? Should the MTO be defined by each country, the Commission (or the Council), or by a combination of each country and the Commission? From the point of view of the economic and financial sustainability of public finances, is it desirable for the MTO to be at +0.25% of potential GDP or -0.5% of GDP? And from the point of view of the social sustainability of public finances? Finally, what can we derive from the MTO on the need to redesign the modus operandi and the European project?

      We use the case of public finances and the MTO definition to push for the MTO to go back to the figure it previously stood at (-0.5% of potential GDP), thus helping Portugal to return to a near balance of public finances that is more socially sustainable, as well as economically and financially sustainable.

      On the other hand, we use the case of the MTO to show the complexity of the way in which European institutions operate, as well as the unnecessary and possibly counterproductive interference in the national decision-making of Member States. This allows finding a more promising direction for its development. We wish for more Europe where there is not enough Europe, and conversely, we will show that Europe could only benefit, both as a whole and each country in particular, from reducing complexity, de-bureaucratising the entire “European semester” process and further implementing the principle of subsidiarity instead of budgetary command and control. This means gradually giving Member States the responsibility for developing their own budgetary rules, in a simple European monitoring framework that should be simpler, more transparent and less intrusive in national budgetary policies.

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