IMF slams weak EU budget fines

2 Feb 17

A more credible system of penalising European Union member states that break the bloc’s budgetary rules is needed, according to the International Monetary Fund.

 

Currently, the European Commission can impose penalties including fines and a suspension of access to EU funds on countries that do not comply with budget rules, such as a requirement that national deficits do not exceed 3% of a country’s GDP.

In a published this week, the world’s foremost financial institution said this enforcement system “lacks credibility” and should instead focus on incentives to encourage member states to comply with the union’s agreed fiscal standards.

“Financial sanctions for countries... exacerbate the financial situations of already distressed governments, limiting the appropriateness of the sanctions and their scope for use in bad times,” the IMF paper said.

It also noted that there is a perception these sanctions aren’t applied equitably, with EU economies with more clout perceived as being treated with more leniency.

When Spain and Portugal were threatened with fines last year, for example, some noted that other economies such as the UK had also been running high deficits for longer than was deemed acceptable but were in no danger of having such penalties applied to them.

In the end, both Spain and Portugal escaped fines, which many analysts believed were unlikely to be imposed in the first place with euro-sceptic sentiment on the rise across the continent and key elections due to take place in a number of nations.

As the fund noted, “elevated sanctions carry a stigma and political cost that make their application very unlikely”.

It suggested that financial sanctions could be applied when a country is at risk of breaching EU rules, but before it has actually done so, with other forms of penalty such as administrative sanctions taking precedence afterward.

A more gradual system could also be applied, it continued, with small penalties for initial or lesser deviations from the rules, with larger non-compliance being penalised more heavily.

However,  enforcing sanctions will likely always remain “highly contentious” and “problematic” in international law as long as member states retain sovereignty over fiscal issues, the IMF said.

“A credible enforcement system will require further political integration,” it noted.

It also called for a better balance of positive incentives for compliance within the system, which is currently “heavily tilted” towards sanctions while the benefits of keeping to the rules are “elusive”.

One option would be to link the volume of EU funds or other subsidies its member states receive to compliance, it recommended.

“It is possible and desirable to have a stronger system of incentives,” it stressed, adding that a lasting solution will need to combine market discipline and stronger fiscal governance.  

  • Emma Rumney

    Emma is a reporter at Cooking Recipes International. She also writes for in the UK.

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