‘Two pack’ austerity package in force but with less vigor

The ‘Two-Pack‘, an EU regulation package for Eurozone’s austere fiscal reform enters into force on 30th May 2013 in all euro area Member States. The new strict fiscal rules for euro area countries proved necessary, after the Stability and Growth Pact (SGP), failed to refrain budget deficits and public debt below 3% and 60% of GDP, respectively. The SGP framework was launched together with the introduction of the euro and was supposed to offer a solid fiscal base for the new currency. Unfortunately it didn’t. In the ‘crazy’ days of the loans bonanza after the turn of the Millennium, every Eurozone country, bank and individual kept borrowing as much as they wanted at exactly the same rates and terms. This imprudent loan spate drove to the Eurozone credit crisis, which first surfaced in Greece in 2009 and then spread all over the euro area and undermined the solvency of the major Eurozone banks. The crisis However this was not a 100% Eurozone made crisis. In reality it was the American credit crunch of 2008 which exposed Eurozone’s defects. Then came the real economy recession which exposed the shortcomings of the economic governance and budgetary surveillance at the EU level. These shortcomings were supposedly addressed with the creation in 2010-2011 of the European Semester of economic policy coordination and the six legislative proposals known as the ‘Six-Pack’, which strengthened the SGP in a number of ways. More austerity for Eurozone For Eurozone though, given the higher potential for spillovers of budgetary policies in a common currency area, a new need appeared, for still stronger mechanisms specifically for the euro area. To address this need, in November 2011 the Commission proposed two further Regulations to strengthen euro area budgetary surveillance. In this affair the influence of the German austere ideology was evident. Berlin, fearing that the salvation of Eurozone may end up exhausting the country’s surpluses, insisted and managed to impose severe austere policies not only in countries like Greece and Ireland but for the entire euro area. This reform package, the so-called ‘Two-Pack’, enters into force on 30th May 2013 in all euro area Member States. According to a Commission memo, “The new measures mean increased transparency on their (member countries) budgetary decisions, stronger coordination in the euro area starting with the 2014 budgetary cycle, and the recognition of the special needs of euro area Member States under severe financial pressure. The entry into force of the Two-Pack also paves the way for further steps to be taken to reinforce the Economic and Monetary Union, as set out by the Commission in its ‘Blueprint for a Deep and Genuine EMU’ published last November”. The Two-Pack comprises two regulations designed to enhance fiscal austerity in euro area Member States. The regulations build on and complement the Six-Pack reforms to the SGP, the European framework for fiscal surveillance, and the European Semester for economic policy coordination. The first regulation applies to all euro area Member States, with special rules applying to those in the corrective arm of the SGP, the Excessive Deficit Procedure (EDP). Almost all Eurozone countries including France are currently in this category with the exception of Germany, Holland, Austria and Finland. Fortunately during the last few weeks the countries under the EDP procedure got two more years to bring their fiscal deficit at the acceptable level of below 3% of the GDP (mainly France and Spain). The second regulation sets out rules for enhanced surveillance for Member States facing severe difficulties with regard to their financial stability, those receiving financial assistance, and those exiting a financial assistance programme. These are the cases of Greece, Ireland and Portugal, the three countries currently under the troika (Commission, ECB, IMF) surveillance and financial backing. On the occasion of the agreement with the Parliament over the ‘two pack’ regulations the European Sting wrote on 21 February, {Yesterday, the Presidency of the European Council came out triumphantly announcing an agreement with the European Parliament, over the so-called ‘Two Pack’ Commission’s proposal, to ‘improve’ budgetary and economic coordination among Eurozone countries. The Irish minister of Finance, Michael Noonan, president of the ECOFIN Council, said he achieved that on behalf of EU member states. It was evident that the whole affair was eagerly promoted by Commissioner Ollie Rehn. This last one didn’t lose either the opportunity and also issued a statement congratulating the Irish Presidency on this ‘achievement’}. Things change During the past few months however many things have changed. The entire EU austerity policy package, powered mainly by the ‘two pack’ regulations, has come under fire from within and without Eurozone. Within, there is a growing fear that the countries under pressure (Greece, Spain, Portugal, Italy, Ireland and even France) may collapse socially and politically and might never be able to return to a growth path, after having zeroed their fiscal deficits. From without, the IMF, the US and the major developing countries are criticising heavily the Berlin inspired Eurozone’s severe fiscal austerity policies. The rest of the world now complains loudly that Eurozone counts on the growth efforts of others and does nothing itself towards this direction. On top of that during the past few days the European Central Bank and its President, Mario Draghi and Vice-President, Vítor Constâncio, have strongly criticised the fragmentation of Eurozone’s financial market. They insist that all Eurozone businesses should be able to borrow under the same conditions, in a strongly built European Banking Union. In such an environment most of the countries applying austerity policies have already secured a two-year extension, to bring their deficits to acceptable levels. If one adds to that the strong pressures for the swift creation of the banking union, it is questionable if the ‘two pack’ regulation will be applied to the letter.