"Did we ever really believe that "Rules are Rules"? How innocent we must have been..."

 

ref:- "EU executive arm eyes ways to boost budget rules flexibility", by Martin Sandbu in the Financial Times

Actually, first to jump out at us today were the reports that Jens Wiedmann is to leave his position as boss of the Bundesbank and member of the ECB policy committee member at the end of the year. As a natural hawk, Herr Wiedmann has had his run-ins with less cautious ECB members with regard to monetary policy, and looked like he was biting his lip pretty hard when then-ECB boss Mario Draghi was pledging "to do whatever it takes" to keep the EU ship afloat, a course of action that Mr Draghi is now feted for.  

It is not strictly the role of any central banker to set and apply fiscal rules, that's for the politicians. But central bankers have to deal with the fall-out of any nations failing to stick to those rules, and on occasion Herr Wiedmann's exasperation with certain EU nations acting in an irresponsibly spendthrift manner (as he would see it) has been made pretty clear. Which is why this piece in the FT on the subject of how the EU is seeking ways of "boosting budget rules flexibility" (or if you prefer, "bending the rules even further") is of particular interest, coming as it does in amongst all the reports of Herr Wiedmann's imminent retirement - one can only imagine what an arch-hawk like him would make of it.

Now, many have pointed out over the years that there seems to be little point in having rules if you're not going to stick to them... and though it's easy to see WHY it's so difficult to find a set of rules that are appropriate to so many nations with wildly differing economies and requirements, the failure to enforce the "regulations"( some have argued) has been a fundamental, perhaps fatal, flaw in the Europe project. The same people would presumably find it mind-boggling that not only do individual nations seek to break permitted limits, but the authorities themselves are seeking to find ways to allow them to do it... and not for the first time.

It sounds like madness on the face of it, and we have to confess that there have been times in the past when we've questioned whether the apparent disregard for budget rules, or indeed the genuine inability to meet those obligations, might turn out to be a deal-breaker for the EU in the long term. It sounds a little less bonkers under closer analysis and in current circumstances though, and the EU commission has plainly done so for a number of years. As we say, this would not be the first time that the rules have been tampered with.

Just to be clear, the budget rules we're talking about are: no nation should run a budget deficit of more than 3% of GDP, nor run a public debt in excess of 60% of GDP. These limits were laid down in a protocol to the Maastricht Treaty way back in 1993, so in effect are set in stone - or at the very least would be extremely difficult to change given the polar opposite views on the subject held by nations within the EU. They have of course been suspended as an emergency pandemic measure, but theoretically are due to be re-applied at the end of 2022 - though the prospect of that actually happening must also be in some doubt. 

Anyway, the debate has started over whether the rules should be adjusted. It's likely to be a very contentious one between hawkish and dovish governments and as we say, it's very unlikely that agreement will be reached. So the focus is on how to get round the rules, and there's an officially sanctioned precedent. The treaty does allow for a certain amount of "leeway" to be exercised by the commission, and in 2015 it released a communication stating that it would use its discretion to allow certain nations to exceed budget limits in return for a commitment to "recommended structural reforms or investments". The "flexibility communication", as it is known, was far from universally popular and was distinctly unpopular with the more frugal (they would say "responsible") governments within the EU as you might expect, but it was issued unilaterally by Brussels and in effect was a fait accompli.

Now many commentators suggest that there is room for further flexibility whilst still paying lip service to the Maastricht rules (which most likely they can't change anyway). One suggestion is that the commission emphasises the fact that the treaty refers to the debt and deficit numbers as "reference" numbers, not limits. This is a distressingly vague term, but might for example be brought into play if arguing that since the rules were laid down when government borrowing costs say 4%-5%, are they still reasonable when rates are a fraction of those levels? To be fair, there would seem to be some sense behind such thinking. Trouble is, what happens when rates go up again (as they seem to be doing now)? Rescind the flexibility communication? Good luck with that...

Another suggestion Mr Sandbu tells us is that the commission ties extra borrowing by governments to carbon transition, effectively treating green spending more leniently, or even excluding it from the numbers completely.

Everyone will have their own view about how enforceable or indeed effective that might be, but cynics would say that all suggested routes around the rules as they stand put even more power into the hands of Brussels technocrats, quite possibly at the expense of sound financial judgement. But these are unique times, and those arguing for more flexibility have the wind at their backs at the moment. Besides, the EU has a long history of being "flexible" with rules and they would argue "if not now, when?". Just don't expect all interested parties to be happy about whatever emerges from the current debate.