Emma Clancy – The EU’s Stability and Growth Pact must go – or we Face a Future of Austerity and Pain

The EU’S Stability and Growth Pact is a weapon of its hegemon Germany to increase its grip on power.

Emma Clancy works as a policy advisor for Sinn Féin and the European United Left (GUE/NGL) in the European Parliament on the Economic and Monetary Affairs Committee and the Panama Papers Committee of Inquiry.

Cross-posted from Irish Broad Left

French President Emmanuel Macron and German Chancellor Angela Merkel at a virtual meeting on 18 May. Photo by EPA-EFE/Andreas Gora/Pool.

A decade of austerity imposed by the European Union institutions and EU member state governments has caused significant deterioration in healthcare services across the EU. The COVID-19 pandemic has demonstrated the EU’s healthcare and public sectors to be ill-equipped to respond to the outbreak in accordance with international best practice.

The Stability and Growth Pact (SGP) and its associated European Semester process are the central tools used to impose austerity across the EU since the 2008 financial crisis. As well as targeting healthcare spending, the European Commission has also targeted pensions, wage growth and job security, and welfare provision.

Harsh austerity has been imposed on member states of the European Union (EU) for over a decade. In addition to the economic adjustment programmes imposed by the ‘Troika’ – the EU Commission, European Central Bank (ECB) and International Monetary Fund (IMF) – on Cyprus, Greece, Ireland and Portugal in 2010-2011, the European Commission has imposed austerity across the EU through attaching conditions to the use of EU funds and loans, and through its annual economic governance procedures.

The SGP, first enacted in 1997, has proven to be one of the most contested and controversial features of the Economic and Monetary Union (EMU), and the broader EU. The SGP imposes two numerical ceilings on government expenditure:

  1. the government debt-to-GDP ratio must be below 60 per cent; and
  2. the annual deficit of member states must be limited to 3 per cent of GDP or less.

The power of the European Commission to surveil and control the national budgets of EU member states was significantly strengthened in 2011 by the adoption of the Six-Pack and in 2013 by the adoption of the Two-Pack, as well as the adoption of the inter-governmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (Fiscal Compact).

The Six-Pack significantly strengthened the power of the Commission over the member states and the Council. It introduced the obligation to keep the “structural deficit” (the discretionary spending by member states separate from automatic stabilisers) close to zero. The structural deficit limits are set by the Commission on a country-by-country basis and must not exceed 0.5 per cent of GDP for states with debt-to-GDP ratios of more than the 60 per cent limit, and must not exceed one per cent of GDP for states within the debt levels.

The Six-Pack also introduces fines against member states for failing to reduce their debt ratio above 60 per cent of GDP by at least 5 per cent per year through applying the Excessive Deficit Procedure applicable previously only to deficits.

The European Semester is the annual programme of coordinated economic policy across the EU, introduced by the Commission in 2011. It essentially aims to make the national budgets of member states subject to the scrutiny, alteration and approval of the Commission and the Council before the final budget plan is finally put to a vote in the national parliament.

The European Semester incorporates the requirements of the SGP and the Macroeconomic Imbalance Procedure, as well as broader structural reforms under the Europe 2020 strategy. In response to the draft budgetary plans submitted by member states, the Commission produces “country-specific recommendations” for individual states.

Transferring wealth from labour to capital

The fiscal rules played a key role in prolonging and deepening the economic crisis in the EU, and in contributing to the long stretch of stagnation and grindingly slow economic growth. While the United States had a GDP almost 10 per cent higher in 2015 than in 2007, the Eurozone’s GDP grew by just 0.6 per cent over the same period. US GDP per capita (an indicator commonly used to measure living standards) increased by more than 3 per cent from 2007-2015, while over the same period in the Eurozone it actually declined by 1.8 per cent. As living standards have declined – devastatingly in crisis countries, and especially in Greece – income inequality has also risen drastically.

Fiscal policy is one of the most important ways a state has to redistribute wealth and contain or reduce income and wealth inequality. The constraints imposed by the SGP have directly limited EU member states’ ability to redistribute wealth. While moves have been made to exempt certain forms of investment from the rules (i.e, national contributions to European Fund for Strategic Investment projects) on the grounds that such investments will generate GDP growth, direct transfers of resources through expenditure on welfare programmes and public services are reduced and constrained by the SGP.

The SGP is often criticised for restraining productive investment that can prompt economic growth, and rightly so. But the social transfers made through government expenditure are also vital for redistribution of wealth and preventing inequality from rising. Access to free or affordable, high-quality public services also plays a crucial role in addressing existing inequalities.

The SGP actively promotes the transfer of wealth from labour to capital. The specific policy measures demanded by the Commission under the European Semester focus on limiting wage growth (particularly in eastern EU states); increasing the threshold age for receiving a pension; privatising state-owned enterprises; promoting longer working hours; demanding a reduction in job security; and cutting funds to social services, particularly healthcare.

An analysis of the country-specific recommendations under the SGP and the Macroeconomic Imbalance Procedure between 2011 and 2018 finds that:

  • From the introduction of the European Semester in 2011 to 2018, the Commission made 105 separate demands of individual member states to raise the statutory retirement age and/or reduce public spending on pensions and aged care.
  • It made 63 demands that governments cut spending on healthcare and/or outsource or privatise health services.
  • Demands aimed at suppressing wage growth were put to member states on 50 occasions.
  • Instructions aimed at reducing job security, employment protections against dismissal, and the collective bargaining rights of workers and trade unions were made 38 times.
  • The Commission also made 45 specific demands aimed at reducing or removing benefits for the unemployed, vulnerable people and people with disabilities, including by enacting punitive measures to force these individuals into the labour market.

Healthcare targeted

The finding that the Commission made 63 demands that governments cut spending on healthcare and/or outsource or privatise health services is based on conservative methodology of excluding similar orders where they are accompanied by instructions to expand access to healthcare.

If these cases are included, the figure totals 74 instructions to cut health spending or privatise/outsource healthcare provision. Greece has not been included in these figures because it has been under a separate austerity regime.

The 63 instructions counted consist of annual orders issued to Austria (7 times), Belgium (1), Bulgaria (3), Cyprus (2), Czechia (4), Germany (4), Finland (6), France (3), Hungary (2), Ireland (5), Italy (1), Latvia (1), Malta (3), Poland (2), Portugal (5), Slovenia (5), Slovakia (6), Spain (3).

These demands have been accompanied by blanket orders to cut public funds across the board in all areas of government spending every year for the member states most affected by the sovereign debt crisis – Greece, Portugal, Cyprus, Ireland, Spain and Italy.

Corrosive impact on democracy

The SGP and its enabling framework has had a corrosive effect on democracy in the EU. A common criticism of the SGP from across the political spectrum is that it is unenforceable. However, despite the lack of concluded sanction procedures, the pressure placed on member states by the Commission has certainly had a demonstrable impact on their fiscal and public policy.

Under the cover of limiting debt and deficits, the European Commission has engaged in significant overreach when it comes to public policy areas that legally fall under the competence of the member states under the Treaty on the Functioning of the EU, such as pensions and the provision of healthcare.

The inconsistent, biased and secretive decision-making process under the SGP is perhaps the most glaring symbol of the EU’s democratic deficit, significantly undermining public confidence in the EU.

Even before the pandemic, income inequality in the EU was at an all-time high, with the average income of the richest 10 per cent at 9.5 times that of the poorest 10 per cent.

Wealth inequality is significantly higher, with Germany and Austria having the highest levels of wealth concentration. The top 10 per cent own at least 50 per cent of the total wealth in the EU, while the bottom 40 per cent own just 3 per cent of total wealth. Such a concentration of wealth inevitably leads to the concentration power and the corrosion of democracy.

Economic nonsense

There was, and remains, no convincing economic rationale behind either the debt ceiling of 60 per cent, or the deficit limit of 3 per cent. The content of SGP and the Maastricht Treaty (1992) convergence criteria it was based on reflect the dominant economic ideology of the 1990s, as well as reflecting the general economic conditions that prevailed at the time. The numerical ceilings of the SGP – that EU member states must keep their budget deficits below 3 per cent, and public debt to GDP ratios below 60 per cent – may have been based on the prevailing standards of 1997 in the EU, but neither threshold has any sound economic basis.

In 1997 interest rates were approximately 5 per cent for long-term borrowing by European governments. The average public debt to GDP ratio in the EU was between 65 and 70 per cent of GDP, while the median public debt among the 11 initial eurozone members was around 60 per cent of GDP. The forecast GDP growth rate was 3 per cent annually, while inflation was forecast at 2 per cent. According to these economic conditions, maintaining the public debt to GDP ratio at or below 60 per cent would require governments to keep budget deficits limited to 3 per cent of GDP.

It is almost universally acknowledged that the SGP has failed to ensure either economic stability or growth in the EU since its introduction in 1997. It has in fact demonstrably acted to stifle growth, and it has deepened and prolonged the double-dip recessions in the EU. The strict fiscal rules have acted as a direct barrier to the recovery of economic growth to pre-crisis levels, and they contribute to the ongoing sluggish growth in the EU.

A Left perspective on the SGP

Even before the COVID-19 outbreak, the SGP was facing unprecedented criticism from member states, EU institutions such as the ECB, European Court of Auditors and European Fiscal Board, and international institutions including the IMF and the OECD.

These criticisms can generally be summarised as follows:

  • The SGP has failed to limit or reduce public debt in the EU;
  • Enforcement of the rules has been biased and politicised;
  • The application of the SGP has had a contractionary impact on GDP growth;
  • The debt and deficit targets are arbitrary and economically unsound;
  • Member states’ budgets are legally a national competence;
  • The calculation of the structural deficit is based on flawed methodology.

All of these criticisms are valid, factually correct and well-documented. The review of the SGP by the Commission that will take place throughout 2020 is an important opportunity to put forward political demands regarding the fiscal rules.

Among the most common proposals for amendments to the SGP are that:

  • Qualifying “green” investment should be exempt from the calculation of the deficit;
  • There should be a “golden rule” exempting productive public investment from the calculation of the deficit;
  • The headline debt and deficit ceilings should be revised;
  • Only the debt-to-GDP ratio should be used;
  • The rules should be simplified in general.

Proposals for reform such as excluding green investment or public investment in general, and simplifying the rules, are welcome, but insufficient. The Left should reject the surplus cult promoted by neoliberal ideology.

The fiscal rules and the European Semester process that enforces them should not merely be loosened but dismantled.

The decentralisation of fiscal powers to the national level will not in and of itself be sufficient to resolve the problems of transitioning to a carbon-free society or economic stagnation. But what is certain is that the resolution of these problems will be impossible within the framework of the SGP rules.

Perpetual austerity, poverty and servitude

The SGP rules have been temporarily suspended in order to respond to the immediate health crisis. But, as EU leaders repeatedly assure us, they will be back.

In 2007, before the global financial crisis, the average eurozone debt to GDP ratio was 65 per cent. Now it is 84 per cent. This time, eurozone members are entering the coronavirus crisis with much higher levels of public debt, and a drastically weakened public sector, after a decade of EU-imposed austerity.

A new and far greater mountain of public debt being added to this – in combination with the future resumption of the SGP rules and the European Semester – condemns the people of the EU to perpetual austerity, poverty and servitude.

At a moment when climate change is posing an existential threat to the planet, and to the future of human civilisation itself, we need to radically transform our economies and societies. This historic task cannot be left to “market mechanisms”. Such a transformation requires a major, coordinated and sustained public investment effort. Maintaining the failed SGP in this context is to fail before we have even begun.

This article is based on the findings of her report, Discipline and Punish: End of the Road for the EU’s Stability and Growth Pact, commissioned by Martin Schirdewan MEP, co-president of the European United Left (GUE/NGL).

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