THE FISCAL POLICY COORDINATION ISSUE COMPARED WITH THE USA

Having the necessary set-up with appropriate surveillance and intervention is one thing, the realities to deal with are another. The US taxation system is mostly Federal, and states must have balanced budgets. With tax-exempt bonds benefiting US residents, the refinancing of states' debts is mostly internal to the USA. The matter is the US Federal General Deficit that does not need to be developed here as a monetary issue as long as dollar-denominated instruments are accepted and the US budget blockage[1] having been widely discussed everywhere. The basic data for 2012 is: receipt tax collection $2.45 trillion, equivalent to 15.8% of GDP of $15.6 trillion expenses, $3.54 trillion determining a $1,327 trillion Federal deficit equal to 7% of GDP. Combined expenses (Federal and states) are $6.28 trillion, equal to 40.3% of US GDP.

The playing field in the EU (28 member countries) is completely different. The European budget is mostly limited to European common institutions cost supporting and specific development programmes (see later). For the period from 2007 to 2013 it is limited to 864 million euros, around 1.05-1.1% of global GNI (GDP plus or minus external exchanges); GDP stands at around 16-16.8 trillion (depending on the source of statistics – IMF, World Bank or CIA).

Consequently, the topic is not at a European level but at a national level; there is a need to limit the divergence of budget policies and public debt. Only general guidance exists, with no real sanctioning – like a limitation of the deficit at 3% of GDP and a debt ceiling of 60% (called the Stability and Growth Pact (SGP)) – soon to be overridden by key member states at the creation of the monetary union (January 1, 1994) and with the adoption of the euro (December 1998). With the crisis budget differences between member slates, fiscal policies and macroeconomic imbalances rocketed with some – such as Greece, Ireland and Portugal – encountering major political and social challenges, including high unemployment (Spain 26%), and some others on the way to surpluses with low unemployment (4.5%) such as Germany. The grounds for financial speculation against debts were there, triggering higher refinancing costs to add to the stress.

To fix the topic, when the financial crisis broke out the EU first adopted, in March 2011 at an Ecofin Council, the Six-Pack regulations to reform[2] the SGP with new requirements for member states in terms of fiscal policy and for fixing macroeconomic imbalances to set progressive sanctions in case of non-compliance with commitments. Further, for the Eurozone, the EU adopted the appropriate legislation based on article 136 of the EU treaty to set a coordination process for the last year budgetary cycle, and member states had to comply with the set rules included in the Treaty on Stability, Coordination and Governance (TSCG) adopted on March 2, 2012 (applicable since January 1, 2013). This reinforces the request for convergence of budgetary policies between member states. The TSCG also introduces financial sanctions in case of breach of the commitments taken to address imbalances detected by the Commission and the following recommendations. However, two pacts adopted on May 30, 2013 add to the set-up with a common budgetary process timeline, which is already applicable, imposing that member countries:

■ By April, publish their medium-term fiscal plan (stability programmes), together with their policy priorities for growth and employment for the forthcoming 12 months (national reform programmes).

■ By October 15, publish their draft budgets for the following year.

■ By December, adopt their budgets for the following year.

The innovation is that the Commission (the executive arm of the Union), after examination, gives an opinion on each draft budget by November at the latest. If the Commission detects severe non-compliance with the obligations under the SGP, it will ask the concerned member state to submit a revised plan. For the Eurozone as a whole, the Commission will publish a comprehensive assessment of the budget outlook for the following years.

Importantly, the Six-Pack process will enhance the soundness of the national budgetary processes by obliging member states to base their draft budgets on independent micro- economic forecasts and ensure independent bodies are in place to monitor compliance with national fiscal rules. The Greek crisis showed a need to rely on better statistics than those available at the time.

The new regulation gives power to the Commission to better monitor and address directly a recommendation to a member state in case it falls under the Excessive Deficit Procedure (EDP). When the budgetary situation of a member state is deemed troubled enough to have major adverse effects on the financial stability of the Eurozone, in such cases the Commission can call on the Council of Ministers. The Council of Ministers can then recommend the concerned member state to adopt corrective actions or put together a draft macroeconomic adjustment programme or precautionary assistance. Such a state will remain under new enhanced surveillance until it has paid back a minimum of 75% of the assistance received. A financial sanction is also to be contemplated in case of non-compliance (capped to 0.1% of GDP) and a reduction plan of the public debt when exceeding 60% of GDP at a minimum l/20th% a year pace.

Finally, the Two-Pack process provides the available tools for an adjustment programme in case a member state is in need of financial support.

This new European-coordinated European budget process is to resolve the seams between member states – and even when they have adopted the golden rule of budget balancing they will still go through the experience to appraise its sustainability over time. Nevertheless, what was accomplished in a short period of time is encouraging, especially when considering the global situation of little or no deficit in the major countries, and a global surplus. The open topic is no longer a monetary one but a political one – sustainability. To what limit is sharing deficits and surpluses for the benefit of better integration within society understood and accepted by those who think they give more than they receive?

Article 13 of the March 2, 2012 treaty should be noted. It may draw the path for further evolution in coordination. “As foreseen in the title II of Protocol (N°l) on the role of national Parliaments in the European Union annexed to the European Union Treaties, the European Parliament and national Parliaments of Contracting Parties will together determine the organization and promotion of a conference of representatives of relevant committees of the National Parliaments and of representatives of relevant committees' commission of the European Parliament in order to discuss budgetary Policies and other issuers covered by this treaty.” What is at stake here is a change between what, in tax collection, could be transferred to European level. Nevertheless, reading official declarations, it may be limited to specific taxes not yet organized – like the tax on financial transactions or the Ecotax which is collected, or will be collected, on trucks. These taxes are either directly connected to international matters, or specific to European territory organization.

  • [1] Article 1, Section 9, Clause 7 of the US Constitution states: "No money shall be drawn from the Treasury but in consequence of appropriation made by law and a regular statement of accounts of receipts & expenditures of all public money shall be published from time to time. Budget & Accounting Act of 1921 and 31 U.S.C $1105 completes the setup. US budget goes from October 1st to September 30th and budget shall be submitted no later than the first Monday of February.”
  • [2] Five directives and one regulation: Regulation EC no. 1466/97 reinforcing the budget surveillance and the coordination; Regulation EC no. 1467/97 regarding speeding up of excessive deficit procedures; Regulation of the European Parliament and European Council on the effective enforcement of the budgetary stability; Council Directive 2011/85/24 on the requirement for the fiscal framework of the member states; Regulation on the prevention and correction of macroeconomic imbalances; Regulation on enforcement to correct excessive microeconomic imbalances in the euro area.
 
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