Source: Katarina Krempova¸ PKF Malta
Over the last year¸ the EU is fighting for its survival over ongoing economic and political crisis. The consequences of insufficient fiscal discipline and control over member states have started to appear.
Why? We are providing you with a simple overview of the key factors and possible solutions.
1¸ Maastricht Treaty & Stability Growth Pact
In 1992¸ the Maastricht Treaty was established in order to achieve macroeconomic stability and fiscal discipline in the EU and its Member States. Therefore¸ the main attention should be given to the convergence of fiscal policies related to each Member State’s debt and deficit levels.
According to Maastricht convergence fiscal criteria¸ a general government debt-to-GDP ratio shouldn’t exceed 60 per cent and the total borrowing should be kept each year to less than 3 per cent of GDP. There are¸ nevertheless¸ some surprising facts reflecting these criteria. How is it then possible that since 1991 the Italian government debt is more than 100 per cent? Or that Germany’s ratio of the general government debt-to-GDP was more than 3 per cent every year from 2002 to 2005? In other words¸ some of the Euro Member Countries and EU itself didn’t respect these criteria in the period of adopting euro and also after.
In this regard¸ we can wonder whether EU will manage to bear the consequences of missing fiscal discipline. It is quite clear¸ that a reduction of budget deficits is closely linked to public expenditures and tax receipts in order to gain budgetary balance. So how it is possible that EU didn’t think about the political and fiscal consequences?
Possible solution:
To be more effective¸ there is a need to strengthen the enforcement of these rules and to ensure more flexibility during economic downturns. However¸ in boom years¸ governments of euro-zone states should be forced to run budget surpluses to be prepared for a global financial or econimical crisis. In addition¸ it is essential for EU to have a better overview of budget-planning and other economic information reflecting euro-zone states.
2¸ Bailouts & Euro creditors’ cuts & Interest Rates
Lack of solid budget policy and growing interest rates resulted into huge unsustainable debts that countries such as Greece¸ Spain¸ Portugal¸ Ireland or Italy can’t get under their control. Indeed¸ this problem has not been caused solely by excessive government expenditure¸ because borrowing in itself is not dangerous if the economy of a country is competitive enough to re-pay its debts.
As we have experienced the financial an