Europe rethinking its severe austerity policies

José Manuel Barroso, President of the EC (on the right), took part in the 39th G8 Summit which was held in Lough Erne, Northern Ireland (United Kingdom), together with Herman van Rompuy, President of the European Council, David Cameron, British Prime Minister and President of the G8 Summit (on the left), Barack Obama, President of the United States, Shinzō Abe, Japanese Prime Minister, François Hollande, President of the French Republic, Enrico Letta, Italian Prime Minister, Vladimir Putin, President of Russia, Angela Merkel, German Federal Chancellor, and Stephen Harper, Canadian Prime Minister. (EC Audiovisual library).

During the past few weeks there is a noticeable change of climate in Brussels towards a more relaxed attitude over economic policies. On Monday the President of Eurogroup and minister for Finance of Holland, Jeroen Dijsselbloem asked in a letter his 16 colleagues in view of their Luxembourg meeting, to reduce the sovereign debt of Greece, Spain, Portugal, Ireland and Cyprus.

The five countries have borrowed some tens of billions from the European Stability Mechanism, and used those special loans to recapitalise their banks. Now Dijsselbloem says that these credits should be directly charged to banks and not burden any more the sovereign debt.

European Sting writer Elias Lacon, produced yesterday a report on the need for direct recapitalisation of banks from the ESM, without burdening with those amounts the sovereign debt of the interested countries. With less sovereign debt the five countries may hope for a quicker return to financial markets and a faster resumption of growth. There is more in this direction though.

Less sovereign debts

Yesterday Ollie Rehn, the EU Commissioner responsible for financial affairs while addressing a group of French legislators in Paris, went a bit further in Dijsselbloem’s direction. According to a Reuters report reproduced by other media, he said emphatically, “it is essential that in the Eurogroup of this Thursday we agreed on the principles of the direct recapitalisation of Eurozone’s banks”. Then Rehn repeated: “In the Eurogroup of Thursday the ministers of Finance must agree on the rules for the recapitalisation of banks”.

There is more economic relaxation going on in Europe however. Probably that is why the euro is gaining some grounds with the dollar. Back to the real economy, some weeks ago the Commission in its Country-Specific Reform recommendations appeared relaxed with the EU member states under austerity programmes or following fiscal deficit reduction policies. It must be noted that the annual CSRRs are proposed by the Commission to each country and adopted by the European Council.

This year the recommendations granted France, Spain and Poland an extra two years, and Belgium, Netherlands and Portugal an extra year, to meet deficit-cutting requirements. The Commission also recommended that Italy exits the excessive deficit category, because the country’s programme for fiscal deficit reduction has been concluded successfully.

The Parliament wants more

The European Parliament despite welcoming this ‘more breathing space’ for the above mentioned countries, criticised heavily the EU Commission for the obvious democratic deficit, while imposing concrete economic policy decisions on national Parliaments. In detail, the joint economic affairs and employment committees of the EU’s legislative debated economic policies last Monday with Commissioners Olli Rehn and László Andor. As a rule legislators criticized the analysis and economic theories underlying austerity recommendations.

According to a Parliament press release “Sven Giegold (Greens/EFA, DE) noted that the CSRRs recommendations include no overview, with hard figures, on how reform is progressing in the member states. MEPs also complained that the analysis and economic theories upon which the Commission based its prescription of austerity were fragmented or inadequate, and Corien Wortmann-Kool (EPP, NL) suggested that the new “six-pack” and “two-pack” tools should be used to check that reforms are put into practice”. The “six-pack” and “two-pack” regulations are the EU legal ‘tools’ with which the Commission imposes fiscal deficits reduction or even austerity policies to member states. What about taxation?

Financial transation tax

At times the Parliament becomes a strong supporter of the Commission’s recommendations and policy proposals, if they comply with what the MEPs see proper and necessary. This is exactly the case of the Financial Transaction Tax. On Tuesday the Economic and Monetary Affairs Committee strongly supported the Commission’s proposal for a wide-scope financial transaction tax, with stocks and bond trades taxed at 0.1% and derivatives transactions taxed at 0.01% in 11 EU countries. The eleven member states wishing to introduce a financial transaction tax through an enhanced cooperation procedure are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

Taking the floor after the vote Anni Podimata (S&D, EL), Parliament’s lead MEP on the matter welcomed the committee’s tenacity. “Despite very intense lobbying, today’s vote proved that Parliament remains consistent and coherent in its approach to this tax”, she said.

What about tax evasion?

All in all the climate in Brussels may have changed favouring less austerity and more popular policies, like the tax on financial transactions. But despite the fact that the European public opinion overwhelmingly blames the money sharks of the financial sector for this four years old crisis, yet very few things have changed in order to punish the culpable parties and make sure that a repetition is avoided in the future. Obviously the EU Parliament is not responsible for that. There are some core EU countries like Britain, which block any proposal for effective measures against tax evasion or controls on financial markets.

It was like that in this week’s G8 meeting. Seemingly fell in a vacuum the much-advertised EU efforts to reinforce the momentum in the global fight against tax evasion and tax fraud during this year’s G8 Council of 17-18 June, which took place in Lough Erne, Northern Ireland under UK Presidency. There was some talk about restricting the ability of the multinationals to shift profits and wealth around the world, but the distance from words to effective measure didn’t diminish at all. In this case Europe is a leader with the automatic exchange of information between tax authorities as from 2015, covering all types of incomes and bank account balances. Unfortunately it’s impossible to see that in a world-wide plan. The G8 and the OECD will continue discussing but not taking effective measures.