Bundesbank: treatment of fiscal rules is a cause for concern

The Bundesbank has criticised the European Commission's treatment of the euro area's fiscal rules. In its May Monthly Report, it argues that the rules have "in many respects been shaped and interpreted so elastically" that they cannot be applied reliably and transparently through the Stability and Growth Pact.

In the report, Bundesbank economists criticise the fact that, owing to the growing complexity of the budgetary rules, frequent changes and numerous, open-ended exceptions, it is now "barely possible" to apply the rules consistently. They note that evaluating whether sanctions might have to be imposed is "often no longer rule-based in the stricter sense, but is above all the result of ad hoc considerations and negotiations".

"Various mitigating circumstances"

Bundesbank experts are also critical of the European Commission's actions with regard to France, for instance. It had become clear that France would fall well short of the initial 2015 deadline for correcting its deficit. However, its failure to meet this target was justified on the grounds of various mitigating circumstances, and the deadline was extended again without the procedure being stepped up or sanctions being imposed. A two-year extension was even granted on the basis of France's commitment to structural reforms. "Overall, this gives the impression that the recommendations are increasingly being adapted to government plans, instead of the other way round," the Bundesbank economists said.

The European Commission had considered initiating a procedure for Italy and Belgium. But here, too, pleas of "various mitigating circumstances" were taken into account, said the Bundesbank. With a debt ratio of around 130%, Italy is the second most indebted euro-area country after Greece. Belgium's debt ratio stands at 106%.

In 2011, the heads of state and government tightened the rules of the Stability and Growth Pact as a result of the sovereign debt crisis in the euro area. The "six-pack", consisting of five regulations and one directive, changed the rules on budgetary surveillance, among other things. "The reform of the Stability and Growth Pact was actually intended to reinforce the debt criterion in order to encourage rapid debt reduction," says the Monthly Report. "However, the European Commission's interpretation looks set to largely counteract that intention."

The Bundesbank believes that ad hoc decisions made at short notice are increasingly taking the place of the strict application of the agreed rules. It argues that sound public finances are key to safeguarding a reliable, stability-oriented monetary policy in a monetary union. With this in mind, "the recent developments in connection with the fiscal rules give cause for concern," the Monthly Report states.