Whether this decision was difficult to take! Scheduled Tuesday, July 5, the opinion of the European Commission on budgetary trajectory of Spain and Portugal was finally released two days later. Proof incredible torments that had to endure the EU executive caught between the hammer and the anvil. The hammer, it was Germany who for several days does not hesitate to get the message of his annoyance vis-à-vis a Commission deemed too lax and, through its Minister Wolfgang Schaeuble n ‘ more reluctant to propose ‘shorting’ Brussels to impose “respect the rules”. The anvil is the risk of forcing Portugal and Spain to start a new fiscal tightening even though, after Brexit, time is the revival of economic and financial risk and that is evoked a “renewal” of European integration with more solidarity.
on the way to sanctions
for two days, the most contradictory information circulated. The Portuguese press ensured that Brussels would show magnanimity, the Spanish press talking about the opening of a sanctions procedure. Again, this is a reflection of very intense discussions and probably tense between supporters of the “firm line” and those of pragmatism. But between economic realism and his own survival as an institution, the Commission finally chose the second option. To appease Berlin and the northern countries, she opted for firmness, believing that Portugal and Spain had not taken sufficient action to correct their budget path
This decision is essential.: it is the first step to initiate sanctions against the two countries which can be up to 0.2% of GDP. Certainly there is no question of immediate sanctions. The Council of Finance Ministers (Ecofin) should confirm the assessment of the Commission to officially launch the procedure. It will then be then asked to “further efforts” to countries. But ultimately, as part of the Two-Pack guidelines and Six-Pack, the Commission may seek sanctions and it will take a “reverse majority” to block the decision, that is, it will have two thirds of the votes weighted by the European Council against sanctions for them to be abandoned. Above all, this is a message sent to Madrid and Lisbon: correct your trajectory or you will be punished. So it is an invitation to austerity.
Those who, in May, when the Commission had postponed its decision two months after the Spanish elections of 26 June, had proclaimed the “death of stability and growth pact “were so wrong. Brussels confirms indeed that the euro area has an economic policy based on austerity and blind obedience to the “metaphysical” rules taken out of any concrete economic reality. This obedience to the rules is a founding structures of the ordo-liberal German thought that registered on 7 July an important victory.
Emergency hitting?
While end 2015, Portuguese and Spanish deficits were respectively 4.4% and 5.1% of GDP, above the 3% of GDP allowed, but we must remember that the eurozone struggle against both growth and low inflation and its accumulated deficit was 2.4% of GDP, while it displays a current account surplus of 3% of GDP. So there is no problem ‘global’ deficit: the “deviations” Portuguese and Spanish do not endanger the stability of the euro area. They come as the two countries have been victims of violent austerity policies that have driven them in recessions. In the end, the unilateral fiscal adjustment has not helped to reduce deficits and debt. This is a failed strategy. And in which the Commission insists. His decision on 7 July, however, could be a serious mistake to result in more than one way.
Inadequate Response
First, because it places the two countries in difficult economic situations. Spain has certainly been known for strong growth in 2013, but this can be explained largely by the end of austerity and declining energy prices. The cycle of the latter is almost complete. If the country is embarking on a major fiscal adjustment as required by the Commission, growth could suffer greatly. In Portugal, the austerity did little to bring back strong, it remained below 2% since 2013. The two countries saw emigration accelerate, inequalities explode and have very low inflation . The cure proposed by the Commission can not cure these ills caused largely by the same medication. It threatens to undermine growth and further increase the debt and deficits.
Replenish deflationary risk deflationary risk
Moreover, by hitting hard on the Spanish and budgets Portuguese, the Commission sends a message to the rest of the euro area: the rules is the only “needle in his compass.” It therefore has clearly inversely to the ECB. No doubt such rigor would make sense if it were accompanied by a real European solidarity to support the activity of these two countries. But as this solidarity is reduced to ghostly plane Juncker, the effect could be very negative: Commission demands a deflationary policy when the ECB is trying to revive inflation suddenly hundreds of billions of euros. Brussels is therefore everything to further isolate the central bank and issue its ineffective policy.
One would imagine that the Commission take note of the refusal to Berlin to play its fiscal leeway by allowing countries go their deficit being given low inflation rates that complicate their task. But no, the Commission continues to think only in terms of unilateral adjustment. Therefore, it is not only the Portuguese or the Spaniards who are affected: French, Italians and Belgians should also expect a tightening. The consequence of this decision is to encourage economic agents to prudence and savings. Exactly what it should not be encouraged as tensions reborn following the Brexit. Pierre Moscovici, Commissioner for Economic Affairs, can claim that it applies “smart rules”, this decision is an economic ineptitude in the current situation.
Risk for Portugal
especially as it poses a serious threat to Portugal in particular. The debt of the country is maintained in quantitative easing ( “QE”) ECB repurchase program of government securities by the fact that the Canadian rating agency DBRS also assigns a rating of “d investment. ” With this decision of the Commission, the agency will be under pressure to lower the Portuguese note. But if it does, Portugal will be immediately excluded from the QE. The rate of its debt may explode. Especially in these times of “flight to quality”. QE ECB acts as a kind of insurance for investors. Does it disappear, Portugal may have to deal with a debt crisis. He will then accept a new “adjustment program” to benefit either QE with a waiver, either UNWTO unlimited rebuys program of sovereign debt by the ECB. The country then risk sinking into another recession. The decision of the Commission is serious because in full post-Brexit turmoil, she takes the risk of another financial crisis.
Political decision
The Portuguese government, led by PS with the support of two radical left parties can not survive such a crisis. The president of the conservative republic will not miss the opportunity to dissolve the assembly to return the right to power. The decision of the Commission imposed by Berlin, is highly political, but it is very dangerous because it can supply the current Eurosceptic. The Left Bloc and the Portuguese Communist Party are sure then to campaign against the EU. They will have more arguments that, on 7 July, the Commission penalized the action of the previous Conservative government, leaving no chance the current government, in place since late November 2015 …
in Spain, the Commission requires the next government spending cuts even as the PP Mariano Rajoy hardly build a coalition and that he himself promised not to resort to new spending cuts, promising even tax cuts. With this decision, Mariano Rajoy may have more difficulty in building a majority: who will agree to govern to restore austerity? Furthermore, these measures may hit the brunt of the autonomous communities (regions) Spain, including Catalonia. This will be one more reason for Independentists of this region, which tear precisely on the budget issue, to regain their unity against a Spanish government that undermines the foundations of the welfare state. Politically, the decision of the Commission is as absurd economically.
Inadequate Response to Brexit
It is especially since it seems to close the discussion on future of the euro area after the terrible slap British vote on Brexit. Two days after the vote, French and German foreign ministers, Jean-Marc Ayrault and Steinmeier had proposed to end the “unilateral adjustments”, judging the “politically dangerous”. The lesson was not retained by the Commission that clearly now trying to look like this “independent body” responsible for enforcing the rules without any further consideration that Wolfgang Schäuble dream. By following this path, Brussels will struggle tomorrow to come and claim to defend more solidarity within the euro area. The proposal Ayrault / Steinmeier seems already dead and buried. No need to wait for the Bratislava summit in September to find out: there will be no “qualitative leap” in the euro area with more solidarity
7 July 2016 marks. victory Wolfgang Schäuble in the euro area. The rules are certainly satisfied, but those who believe that this respect will save the Eurozone could well be wrong. Because deficits are only a reflection of internal imbalances in the euro area. Refusing to address these imbalances, to see the impact of low inflation on the public accounts, to consider the disastrous effects of past inflation on the productive capital of the affected countries and understand that the eurozone can survive with a German current account surplus of 8% of GDP, is to refuse to really want to “reform” the euro area. It is being blind to a doctrine that has proven failures. Yet it is the conduct of the Commission. The response to Brexit will be weak and inadequate. Eurosceptics of all kinds may be rubbing their hands: EU reform of disability has now been proven brilliantly
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