Fitch Ratings says that the European Commission’s (EC) efforts to enforce fiscal discipline on five EU member states show that the measures adopted to tackle the eurozone debt crisis last year are being put into practice, although this does not alter the European authorities’ gradualist approach to resolving the eurozone sovereign debt crisis.
The EC said that Hungary had not made sufficient progress towards correcting its excessive deficit, while Belgium, Cyprus, Malta, and Poland had taken effective action. This is the first time that the Commission has applied the revised Stability and Growth Pact (SGP), which came into force on 13 December 2011.
The Belgium ruling follows that country’s decision to freeze €1.3bn of spending, taken after the EC said that weaker-than-expected growth would push the country’s 2012 deficit up to 3.25% of gross domestic product (GDP), above the SGP’s 3% limit.
At their December summit, eurozone leaders said they would build on the enhanced SGP and other measures introduced during the sovereign debt crisis, and create a “new fiscal compact” that would include national rules on balanced budgets, and reporting by single currency members of their debt issuance plans prior to issuance.
This is an early indication that the enhanced SGP, which makes sanctions automatic by requiring a qualified majority of finance ministers to block rather than enforce them, is being implemented effectively. It could bolster the step-by-step measures that various eurozone sovereigns are taking, aimed at fiscal consolidation and structural reform.
Nevertheless, the emphasis on fiscal discipline at a national level in the SGP and the fiscal compact is consistent with Fitch’s view that EU politicians have settled on a gradualist approach to the crisis, as opposed to a one-off solution. As Fitch mentioned in December a comprehensive solution to the eurozone crisis is technically and politically beyond reach.
Enforcing the revised SGP does not represent a solution to the crisis. Rather, it shows a commitment to making the SGP a credible tool for enforcing fiscal discipline. A key test of its credibility will be whether sanctions are applied consistently across all eurozone members that breach the SGP if they do not take remedial action.
The economic and financial costs associated with the gradualist approach to the crisis, and the bouts of market volatility that result, and the continuing absence of clarity on what a reformed single currency area would look like were among the factors that prompted Fitch to put six eurozone sovereigns, including Belgium, on rating watch negative on 16 December 2012.
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