(The Bloomberg View) -- As it does each year, the European Commission is digging into the budgets of euro-zone member states to see if they comply with the bloc’s fiscal rules. The recent slowing of the European economy complicates this work — or ought to. It suggests that Brussels should not be overly strict. The commission needs to sanction serious violations, but it can afford to be lenient with borderline cases.
The commission’s current forecasts say that output in the euro area will expand by around 2 percent this year and next. But the most recent signs are less encouraging. Growth is faltering. The upsurge in U.S. protectionism threatens Europe’s exporters. And heightened volatility in financial markets is undermining confidence. The European Central Bank has rightly promised to end its bond-buying program at the end of this year, which puts more of the burden of maintaining macroeconomic stability on fiscal policy. No question, the euro area should take the rules seriously and use the recovery to reduce public debt — but this doesn’t mean turning a blind eye to the risk of a renewed slowdown.
As part of its review, the commission has asked for further clarification of the budget plans submitted by Belgium, France, Portugal, Slovenia and Spain. In one case — Italy — it took the unprecedented step of telling the government to submit a new plan. This was right: Rome’s first attempt didn’t so much break the rules as repudiate them, and Italy’s enormous public debt leaves no room for error. Investors are alarmed about the plans, and there’s a danger that the mood will spread, putting other countries at risk.
Italy, though, is an extreme case. France’s budget deficit will rise a little next year to 2.8 percent of output, but that’s because of a temporary fall in revenues caused by a change to the tax system; the underlying cyclically adjusted budget deficit will fall regardless (albeit by a bit less than the commission had required). The same is true of the other countries under examination (except for Slovenia, which hasn’t yet submitted a full budget for 2019).
The commission ought to maintain the credibility of its fiscal rules by punishing serious violations. But cracking down on unimportant deviations, especially if the European economy turns out to be decelerating, would be bad economics and worse politics. If the rules are to command support, they need to be enforced — judiciously.
Editorials are written by the Bloomberg View editorial board.
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