The ban on deficits: from Berlin to Brussels
Politicians prefer to pretend that fiscal policy is simple: the government should not spend more than it receives. This message resonates well with voters, as household and small business budgets do operate this way. Fiscal prudence also served Germany, the economic powerhouse of the EU, well for a long time. It is therefore unsurprising that a clear and restrictive set of fiscal rules to be imposed on all EU member states was an important condition for German participation in the Euro. Berlin was one of the key architects of the EU’s Stability and Growth Pact (SGP), the rules-based mechanism through which the European Commission scrutinizes, and may propose sanctions for, budget imbalances of member state governments. For smaller net-creditor member states, especially the Netherlands, the German position was convenient: the Dutch always had a powerful ally to enforce austerity on Europe. Greeks won’t forget how Dijsselbloem and Schäuble banded together to crack down on Athens.
But fiscal policy is not simple and economic contexts change. Government budget deficits and debts can be too low as well as too high, depending on the state of the economy. Deficits can spur much-needed investment. Fiscal stimulus may be required at times when central banks have exhausted their monetary arsenal. And restrictive fiscal policy aimed at servicing government debt can actually create a deflationary spiral that increases the very debt the policy seeks to reduce. There comes a point when austerity no longer makes sense because it does more harm than good. The European Union has learned this lesson throughout the crisis years. Former Euro group president Dijsselbloem admitted to asking too much from Greece in terms of reform.
Portugal’s spectacular recovery came about after its government decided to partially go against EU-imposed austerity. The Commission itself has become increasingly flexible in its enforcement of the SGP and now recommends more fiscal expansion to Eurozone countries. It has recently singled out Germany and the Netherlands for not spending enough given the current economic climate. Berlin is catching-up quickly: it has taken more pragmatic positions in recent conflicts over EU fiscal surveillance, as well as Eurozone reform. Yet the Dutch have become more combative.
The battle of the Leagues
Germany’s withdrawal as Europe’s most ardent defender of the balanced budget coincides with Brexit and Macron’s ambitions for the EU, and all three are considered detrimental to Dutch interests in The Hague. The Dutch, who are often considered “more German than the Germans”, have sought strength in numbers through an alliance with seven other Northern EU member states: the Baltic states, the Nordic member states, and Ireland. But the Dutch really call the shots.
The Hanseatic League has played a pivotal role in obstructing Macron’s ideas for Eurozone reform, and it has played a decisive part in the slumbering conflict over Italian fiscal policy. When the conflict erupted in November 2018, the immediate trigger was the newly elected Italian government consisting of Luigi Di Maio’s Five Star Movement (M5S) and Matteo Salvini’s Lega. The new government placed its fiscal policy at odds with EU fiscal rules to cash in on two key electoral promises: spending more and sticking it to Brussels. The result was a dramatic standoff between the Hanseatic League and the Italian government, with the Commission playing a lose-lose game as arbiter between the two sides. A tough Commission stance on Italy would have become a staple feature in Salvini’s anti-EU campaign. Yet when the Commission ultimately decided not to pursue punitive measures against Rome, Dutch Prime Minister Rutte was quick to blame the EU executive for not upholding the EU’s fiscal rules.
Salvini was made in the North (of Europe)
Let’s be clear: most of Italy’s economic woes were home-made and not caused by its Euro-area membership. It is also difficult to justify fiscal stimulus for a country which has a debt-to-GDP ratio that stands at more than 130%. But the Italian fiscal stance certainly has not benefitted from years of fiscal consolidation, and the current economic difficulties are similar to those Italy faced when the crisis subsided despite years of fiscal consolidation that hollowed out Italian social services. Fiscal policy that may have worked for export-driven economies in the North has not helped EU member states in the South. Italy’s poverty rate is at a record high.
This is the fallout of the dogmatic insistence on austerity and budget balance in the North of the EU. It creates the very conditions that drive voters towards populist and Eurosceptic movements like Salvini’s Lega, which is bound to further polarize the conflict over EU fiscal policy and stifles all debate on viable policy alternatives for Italy. Rome must be able to increase both the quality and quantity of public investment in order to tackle its massive debt. Much of this can be done by making existing expenditure more efficient and effective. But a Hanseatic League that categorically rejects arguments for fiscal expansion does not encourage Italians – it alienates them. For a country that is famous for its ‘polder model’ of consensual decision-making, the Dutch could learn something from the growing German pragmatism towards the black zero.
Reinout van der Veer is a doctoral candidate at the Public Administration and Sociology department of Erasmus University Rotterdam and visiting researcher at the WZB Global Governance unit between January and March 2020.
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