Margarida Vasconcelos: the Macroeconomic Imbalances Procedure mechanism, as the Stability and Growth Pact, is not enforceable against large countries such as Germany

The sovereign debt crisis has opened the door for further economic and fiscal policy integration. Several new rules, intended to strengthen economic governance in the EU, have been introduced mainly through the so-called Six Pack, the Two Pack as well as the Treaty on Stability, Coordination and Governance. The Commission is allowed, despite the lack of legitimacy, to interfere with member states’ budget decision making and to control national economic policies.

The EU Economic governance "Six-Pack" has given Brussels unprecedented power to intervene in domestic economic policies. There is now a binding process to monitor and correct the emergence of imbalances in national economies. The EU Member States are not only monitored for excessive deficits and debts, but also for imbalances and falling competitiveness. The so-called Macroeconomic Imbalances Procedure mechanism, which comprises a regular assessment of risks of imbalances, including an alert mechanism, is aiming at early detecting Member States with potentially problematic levels of macroeconomic imbalances. It is based on a scoreboard, which consists of a set of economic and financial indicators, with corresponding indicative thresholds, in order to identify imbalances emerging in different parts of the economy. A scoreboard rates therefore member states' performances as regards economic stability and competitiveness. It is composed of macroeconomic and macro financial indicators for Member States, and reviews macro-economic indicators including current accounts and external debt, price or cost competitiveness as well as productivity, unit labour costs, public debt and private sector credit. Moreover, the Commission takes into account economic growth, employment and unemployment performance, productivity and sectoral developments.

Every year in November the Commission presents an Alert Mechanism Report, which identifies Member States that the Commission deems to be affected by, or at risk of, imbalances. The aim is to identify and address imbalances that hamper the functioning of the EU economies and may jeopardise the proper functioning of the Economic and Monetary Union.

Brussels has been turning a blind eye on Germany’s 6.5% current account balance, which is over the 6% EU limit, and has been an issue since 2007. But, in November 2013, the European Commission presented its third Alert Mechanism Report on macroeconomic imbalances, which has identified Germany as one of the Member States for which further analysis, an in-depth review, was deemed necessary in order to ascertain whether there are imbalance in need of correction.

The Commission undertakes in-depth reviews for Member States where the alert mechanism indicates possible imbalances or a risk. The in-depth review covers an analysis of sources of imbalances in the Member State under review and whether these imbalances constitute excessive imbalances. It takes into account the severity of imbalances and possible spillovers to other Member States, whether the Member State in question has taken appropriate action in response to Council recommendations.

The Commission has therefore carried out an in-depth review in order to ascertain the nature of the German current account balance and conclude whether it is experiencing imbalances. At the time, Olli Rehn, the Commissioner for economic and monetary affairs, said that the Commission was not "criticising Germany's external economic competitiveness or its success in global markets, in fact that is what we want from all EU member states," but then he pointed out "a persistent high surplus also means that Germans are persistently investing a large part of their savings abroad". Barroso also stressed, "This is not about questioning Germany’s competitiveness…” but whether it “could do more to help the rebalancing of the European Union economy.” The Commission has therefore decided to investigate whether Germany's trade surplus hinders economic growth in the eurozone.

Germany’s low wages keep domestic consumption unreasonably low which, consequently, makes it more difficult for other eurozone member states, chiefly southern countries, to regain competitiveness. It is important to recall that the Council, in the context of the 2013 European Semester, recommended Germany to create conditions that enable wage growth to support domestic demand and to take measures to further stimulate competition in the services sectors. The Council as well as the European Commission believe that Germany should implement reforms to strengthen domestic demand such opening up its services market and encouraging wages to rise in line with productivity, as this would help the rest of the eurozone countries to get out of recession.

It is important to recall that last October the U.S. treasury slammed the German economy's dependence on exports. The U.S. Department of the Treasury Office of International Affairs’s Report to Congress on International Economic and Exchange Rate Policies pointed out that “countries with large and persistent surplus need to take action to boost domestic demand growth and shrink their surpluses” in order to “ease the adjustment process within the euro area”. The report particularly noted that “Germany has maintained a large current account surplus throughout the euro area financial crisis” and that “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment.” It then stressed, “The net result has been a deflationary bias for the euro area, as well as for the world economy.” The US Treasury Secretary Jacob Lew, said "Policies to promote more domestic investment and demand would be good for the German economy and for the global economy,".

The Commission has recently published the findings of the in-depth reviews carried out into 17 Member States identified in last November’s Alert Mechanism Report as showing signs of macroeconomic imbalances. The analysis of the in-depth reviews have shown that Germany is experiencing macroeconomic imbalances which need to be addressed and require policy action. The European Commission noted that Germany’s “current account has persistently recorded a surplus at a very high level” which “deserve very close attention.” According to the European Commission “Germany should aim to identify and implement measures that help strengthen domestic demand and the economy's growth potential.” The Commission also pointed out “The need for action so as to reduce the risk of adverse effects on the functioning of the domestic economy and of the economic and monetary union is particularly important given the size of the German economy.”

All Member States experiencing imbalances are required to take into account the findings of the in-depth reviews in their National Reform Programmes, and Stability or Convergence Programmes, which must be presented by the end of April. Hence, Germany, as well as the Member States experiencing imbalances that were not found to be excessive, have been asked to take the findings of the in depth reviews into account in their programmes. Then, the Commission will put forward policy recommendations for these member states, including Germany, to correct imbalances. So far Germany has done nothing to correct its imbalances.

An excessive imbalance procedure would be initiated if the in-depth review identified severe macroeconomic imbalances in a Member State, including imbalances that jeopardise the proper functioning of the economic and monetary union. On a recommendation from the Commission, the Council may declare the existence of an excessive imbalance and recommend the Member State concerned to take corrective action within a specified deadline to remedy the situation. Such recommendations may address policy challenges across several policy areas such as fiscal and wage policies, product and services markets. Any Member State for which an excessive imbalance procedure is opened would be required to present its policy intentions designed to implement the Council recommendations in a corrective action plan. The Member State concerned would be under the obligation to report regularly on the progress of implementation. The Council will assess the corrective action plan and, on the basis of a Commission report, it will decide whether or not the Member State concerned has taken the recommended corrective action. The regulation on enforcement measures to correct excessive macroeconomic imbalances, lays down a system of fines for correction of macroeconomic imbalances in the euro area. Hence, if a member state repeatedly fails to comply with Council recommendations to address excessive macroeconomic imbalances would be subject, as a rule, to a yearly fine (up to 0.1% of GDP), until the Council concludes that it has taken corrective action to comply with its recommendations.

However, in what concerns Germany, an “in-depth review” is as far as the Commission will go. According to the EU Energy Commissioner, Guenther Oettinger, it is "unthinkable" that Germany's imbalances would lead to a fine. He said, "In the framework of this inquiry, I consider a fine or the setting of a ceiling to be unthinkable”. In fact, it is very unlikely that Germany would be required to change its policies.

According to the US Treasury “Stronger domestic demand growth in surplus European economies, particularly in Germany, would help to facilitate a durable rebalancing of imbalances in the euro area.” However, it noted that the EU’s annual Macroeconomic Imbalances Procedure, “…remains somewhat asymmetric and does not give sufficient attention to countries with large and sustained external surpluses like Germany.” It seems that the Macroeconomic Imbalances Procedure mechanism, as the Stability Growth Pact, is not enforceable against large countries such as Germany. It is important to recall that in 2004 the Council of Ministers did not apply sanctions against France and Germany that had run excessive deficits under the SGP for years. Then, at Germany’s request, the Pact was reformed in 2005 introducing more flexibility.

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