An International Monetary Fund working paper has said enforcement of eurozone budget rules is too lax, just one week after Finance Minister Edward Scicluna told MEPs he favoured a more “flexible” approach to applying them.

In a paper published yesterday, three IMF economists argued that the EU's budget deficit rules lack effective punitive measures, noting "a poor record of compliance" with key rules across the eurozone.

The IMF report urges the EU to adopt a "carrot and stick" approach, with more tangible benefits for countries which stick to budget targets and “more credible sanctions” for those which don’t.

Report writers went on to note that “distorted political incentives” are contributing to the eurozone’s fiscal woes and that existing budgetary rules have not managed to eliminate member states’ fiscal biases, from running up large deficits to procyclical policies, whereby governments are big spenders during good times and tighten belts when times are tough.

We have to adapt rather than being rigid- Finance Minister Edward Scicluna

The IMF’s calls for stricter observance of EU budgetary rules runs counter to views expressed by Prof. Scicluna, sitting ECOFIN president, who last week told MEPs that he felt the EU needed to ensure a degree of flexibility around budget rules.

Speaking to MEPs in Brussels, he argued that "it's a very fine line between bending the rules or being flexible, and breaking the rules."

"We have to adapt rather than being rigid...and I'm referring to the two-pack, six-pack and growth and stability pact," the minister said, as called for “flexibility”.

The EU's two- and six-packs are mechanisms introduced to strengthen budgetary surveillance, transparency and economic governance across the eurozone in the wake of the global financial crisis that sent many eurozone economies into a tailspin.

 

Prof. Scicluna met with MEPs in Brussels last week. Video: European Parliament

EU stability and growth pact rules require eurozone countries to keep budget deficits within 3% of GDP and public debt below 60% of total economic input.

Stability and growth pact rules are grounded in the belief that inflation can be kept in check by keeping fiscal deficits to a minimum. The rules, originally introduced to mollify German fears that a shared European currency would encourage inflation and lead to an economic crisis in one member state spilling over into others, have come in for plenty of flak over the years.

Critics have said that the rules are misguided, one-dimensional and unevenly enforced, with larger member states given greater leeway. 

Faced with mounting criticism and civilian unrest in austerity-pinched member states, in late 2014 the EU began modifying the way it talked about budget rules.

In language which Prof. Scicluna echoed last week, the EU had issued guidelines which said member states undergoing structural reforms would be afforded “flexibility” in reaching pact targets.

Five eurozone member states - Greece, Ireland, Portugal, Spain and Italy - have had a tougher time with EU budget rules than most. Photo: ShutterstockFive eurozone member states - Greece, Ireland, Portugal, Spain and Italy - have had a tougher time with EU budget rules than most. Photo: Shutterstock

Last year, the eurozone’s public finances reached their best level since the start of the financial crisis in 2008, with deficits declining to a 1.7% average. Nevertheless, public debt continues to weigh on eurozone government books, reaching an average of 91% of GDP.

Malta, with a deficit of 1.4%t and debt standing at some 64% of GDP, is faring better than the eurozone average.

‘IMF remarks are very helpful’ – Prof. Scicluna

Asked to comment on the IMF working paper, Prof. Scicluna inched back from his earlier comments to MEPs, though he insisted eurozone member states could not be accused of laxity in enforcing budget rules.

"The sacrifices endured by the people in Ireland, Spain, Portugal, Cyprus and Greece is there for all to see," the minister told the Times of Malta. 

Prof. Scicluna nevertheless welcomed the IMF's contribution. 

“It is very salutary that the IMF, as an international monetary institution of great respect, makes these remarks."

Prof. Scicluna said he had highlighted the IMF’s objectivity during the last Eurogroup meeting and had strongly recommended that “as members of the Eurozone, we should be heeding the IMF’s advice and recommendations”.

The minister’s more cautious tone reflected his reply to Swedish conservative MEP Gunnar Hökmark during last week’s ECON committee meeting in Brussels.
Mr Hökmark had expressed consternation at Prof. Scicluna’s initial remarks and insisted that "rules are there to be respected, not bent”.

The minister replied by telling the EPP member that he had been misunderstood.

"I didn't mean to [suggest] bending of rules of any sort. I'm more for keeping the reputation of the rules in place and respecting it," he said, before going to reiterate his belief that "a degree of flexibility" had to be built into EU budget plans as a contingency measure.

Pressed by Mr Hökmark to clearly state the Maltese presidency's position, the minister acknowledged that "we have to work within the rules".

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.