The EU Economic and Financial Committee’s (Ecofin) decision to suspend the Stability and Growth Pact’s (SGP) sanctioning mechanism, could place Europe’s entire fiscal framework in jeopardy, according to a report by Standard & Poor’s. ‘To all intents and purposes, the rules-based fiscal framework in Europe has virtually disappeared,’ said credit analyst Moritz Kraemer. ‘After [this] decision, it is hard to imagine how any future violations could possibly lead to a full application of the rules. Doing so would demonstrate such double standards that corrosive effects for the wider European agenda would be likely,’ he added. Ecofin’s decision could, in the long term, have negative consequences for sovereign ratings in the Eurozone, if reduced peer pressure to consolidate public finances leads to laxer fiscal policies, according to the ratings agency. The ‘AAA’ sovereign credit ratings on the Republic of France and the Federal Republic of Germany are unlikely to be affected because, despite current fiscal pressures in both countries, the trend in their public debt profiles is sustainable. However, in the longer term, the Ecofin decision may affect the ratings on other Eurozone sovereigns that depend more on external peer pressure for fiscal consolidation. The decision may prove to be the biggest blow yet against the architecture of fiscal coordination in Europe, as it seems to be at odds not only with the spirit, but also the letter, of the Maastricht Treaty. As a result, the convergence of fiscal performance and, indeed, sovereign credit ratings, in the Eurozone could come to a halt, and eventually even be reversed.
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