Two decisions of the European finance ministers provoked fluster and accusations of "double standards" and unequal treatment of countries in and outside the eurozone. The first decision, taken by the eurozone finance ministers (the Eurogroup), is to respect, though not entirely, the decision of the Spanish Government to ease at its own will the 2012 budget deficit target. Two weeks ago Madrid took this "sovereign decision", in the words of Prime Minister Mariano Rajoy, to aim at a deficit of 5.8% instead of the planned 4.4%. The reasons are the country's failure to meet the 2011 target to reduce the deficit to 6% (the deviation is more than 2%), as well as the poor economic outlook for 2012. The eurozone finance ministers corrected the target to 5.3%, but either way it is still significantly over the 4.4% target. Spain, however, is committed to achieve the "great goal" to reduce its deficit below the limit of 3% of GDP in 2013.
The second decision of the finance ministers, this time at EU level, is to freeze nearly 500 billion euro of scheduled commitments for Hungary from the EU cohesion fund. The reason is the country’s non-compliance with the recommendations for correction of its excessive deficit and the penalty will take effect from 1 January 2013, if by then Budapest does not take the necessary action.
Both decisions sparked comments that there were "double standards" with regard to both countries. Some finance ministers (according to EUobserver – Austria`s, Britain`s, Poland`s and Czech Republic`s) said that Hungary should be given more time, like Spain, and that the sanctions were political. According to Polish media, Polish Finance Minister Jacek Rostowski did not support the sanctions on grounds that their size was much larger, compared to that applied to eurozone countries, and suggested a two-step approach to be applied - first a sanction amounting to 0.2% GDP to be applied, which eventually to grow to 0.5%. Bulgaria also advocated the lower sanction. There were abundant comments on the issue in the media too, which attacked EU Economic and Monetary Affairs Commissioner Olli Rehn with semi-questions and semi-rebukes.
Spot the difference
What is common between Spain and Hungary is that both countries are in excessive deficit procedures (EDP), as are 23 out of 27 EU countries and 13 out of 17 eurozone countries. However, this is where the similarities end and the differences begin. Spain has been subjected to the EDP since April 2009 and this is its first breach of the Stability and Growth Pact after the euro was introduced in 1999. The deadline for correction of the excessive deficit is 2013.
Hungary has been in an EDP since it joined the EU in 2004, which is a record for the union. Although the deadlines have been extended, so far Budapest has failed to bring its deficit back within limits, though it has satisfactorily fulfilled the Council recommendations. Tensions between Budapest and Brussels came after the Hungarian government proudly announced that it had met the requirements and the country would end 2011 with a surplus of 3.6%. In response, the European Commission has repeatedly reminded Budapest that this surplus is the result of the government's decision in 2010 to nationalise private pension funds and even in 2013 the budget deficit would again exceed the limit of 3%. That is why Brussels insisted on measures to be applied that have sustainable and long term effect.
Olli Rehn recalled that in the autumn of 2011 the European Commission warned countries, which, according to the autumn economic forecast, could fail to meet their deadlines for correction of excessive deficit. Special attention was paid to countries with deadlines in 2011 and 2012 - Belgium, Cyprus, Malta, Poland and Hungary. Four of the five countries have taken additional fiscal consolidation measures, that are assessed by the Commission as sufficient. Only for Hungary the Commission concluded that the measures did not ensure sustainable deficit reduction, which resulted in the proposal for sanctions, approved by the finance ministers on 13 March. They will discuss the issue again in June and if decided that Hungary has taken the necessary measures, the sanctions would be lifted.
With regard to Spain, at the moment the Commission is collecting data from the Spanish authorities for the reasons for the 2011 budgetary slippage. It is also expected in late March the country to adopt its budget for 2012. In the first half of May the European Commission will present its spring economic forecast and assess the course of the excessive deficit procedures. If we consider that Spain had not complied with the recommendations, we will not hesitate to take action, Olli Rehn stated.
Are there double standards?
As regards the comparison between the amount of sanctions for eurozone countries and non-eurozone countries, it was like "comparing apples and oranges," the commissioner said. He recalled that following the recent changes in the implementation of the excessive deficit procedure, adopted last year as part of the package to strengthen the EU economic governance, the eurozone countries could be sanctioned with a fine of 0.2% of GDP, which could grow to 0.5% in case of repeated breach. In this case the sanction "is indeed triggered immediately as a fine and that money is lost, and there is a hole in the national budget," Olli Rehn underlined. As for the countries outside the eurozone “it is a matter of rather long delay concerning the commitments of structural funds which come from the EU budget”, but not money from the national budget. Moreover, in this case the country concerned has more time for remedial action and may prevent the effective entry into force of the penalty.
However, there is a significant difference and it is in the way decisions on sanctions are taken for countries in and outside the eurozone. According to the amendments adopted in the economic governance package (‘Six Pack’), the decision on sanctions against a country in the euro area is taken by the Council by the so called reversed qualified majority. This means that if the Commission decides to impose sanctions, the Council may reject it only if there is a qualified majority. Otherwise, the decision takes effect automatically. While in the case of countries outside the euro area, the decision to impose sanctions is taken by normal qualified majority, "which means less automaticity and it means less pure rules-based approach and more, say, political influence in the discussion," Commissioner Olli Rehn admitted.
The introduction of the reversed qualified majority voting rule was subject of lengthy disputes between Parliament and the Council during the negotiations on the ‘Six Pack’. Ultimately, it was adopted precisely on the grounds that sanctions thus become more automatic and do not dependent on political bargaining among the member states. The changes, however, are focused only on the euro area, which is understandable, given the spread of the debt crisis.
The case of Hungary, however, showed clearly the disadvantage of the usual voting procedure - there is always room for political manoeuvre. Moreover, Budapest is under fire on all fronts – the country is subject to three infringement procedures on suspicion of violating the independence of its central bank and judiciary. It is therefore not surprising that sanctions were perceived as part of this massive and prolonged confrontation between the Hungarian authorities and European institutions. The fact is, however, that Hungary is pressed to the wall because it is forced to ask for a loan from the IMF and the EU, but it will not get it without observing the rules. The OECD published a report on the state of the Hungarian economy, according to which receiving external financial assistance is necessary to enable the country to undertake fiscal consolidation and reduce its debt burden.
In this sense, Commissioner Olli Rehn is right when saying that actually sanctions are not a punishment, but an incentive. The real punishment will come from Hungary itself if it fails to put its finances in order and drive its economy upward. And the forecasts are not promising at all - according to the European Commission, the Hungarian economy will mark a symbolic growth of 0.1% in 2012. The OECD warned that the country needed structural reforms and measures to reduce the large households debt.
However, it is important to bear in mind, when talking about double standards, that here a euro area country and a non-euro area country are being compared. Decisions taken for a eurozone country could have implications for all other members of the monetary union, while those concerning countries outside the euro area have primarily national consequences.