The EU's Broken Budget Rules Need Changing

Time to clean up the rule book.

Photographer: Marcel Van Hoorn/AFP/Getty Images

Rules are there to be broken -- and that's official. Spain and Portugal have just escaped punishment for breaking the European Union's budget-deficit limits.

In the EU, such lapses without consequences are not exactly uncommon. In the case of the budget rules, that's a good thing, because the rules are widely acknowledged to be no good. But here's a radical thought: Bad rules that nobody has any intention of enforcing would be better scrapped.

The debt-and-deficits rules, part of the 1997 Maastricht Treaty, were designed to assure Germany and other fiscally conservative euro-zone members that less disciplined governments wouldn't get a free ride. They've failed -- and in two distinct ways. Too much wasteful spending remains a problem in many countries. And the pressure to cut, such as it was, has fallen too heavily on public investment.

Spain's budget deficit was 5.1 percent of gross domestic product last year and Portugal's was 4.4 percent -- both in excess of agreed-upon targets. Breaching the EU's deficit targets without permission is supposed to be met with a fine of up to 0.2 percent of GDP. But the targets, based on a ceiling of 3 percent under normal circumstances, are too low. Under current conditions, it would be a mistake for some countries to be on the right side of that number. Europe has been suffering from a serious shortfall of demand, and fiscal stimulus was the right response.

Rule Breakers
European Union nations aren't sticklers for the deficit rules
 
Sources: Ifo Institute, Eurostat
*Deficit breaches are allowed in case of recession

Spain, moreover, has been a bold reformer in other ways. Its conservative government pushed through tax and labor-market reforms that helped to restore growth, now running at more than 3 percent. Its government deserves to be commended, not punished. Portugal is in worse shape, to be sure, with its high public debt, sluggish growth and dangerously fragile banks. Its government does need to undertake a fiscal correction -- but fining it for failing to do so would hardly have made that politically challenging task any easier. Again, therefore, Europe was right to withhold punishment.

Europe's leaders need to rethink. They call the budget rules the "cornerstone of the EU's economic governance." What nonsense. Rules too dumb to be enforced should be mended or scrapped.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.