EU relaxing budget rules could cause another euro crisis, former CEO of DNB says

The European Parliament’s recent decision to relax the budget rules for its member states could cause a new euro crisis, according to Nout Wellink, former president of De Nederlandsche Bank (DNB). The laxer rules increase the chance that large countries like Italy, Spain, and France won’t get their high government debts under control, causing tensions in the eurozone, Wellink told the Telegraaf.

The stability pact implemented in 1997 stated that EU Member States must bring their national debt below 60 percent of their gross domestic product (GDP) and must strive to ensure that their budgets no longer run a deficit in the longer term. At the proposal of the European Commission, the budget deficit target will become 1.5 percent instead of a balanced budget. And countries that invest sufficiently in a stronger economy will have more time to reduce their deficit and debt.

“The entire budget process is being weakened,” Wellink said to the newspaper. “My big concern is that three large countries have a debt of more than 100 percent: Italy, France, and Spain. With these relaxed rules, these three large countries will not get their debts under control.”

Wellink fears “increasing tensions between euro countries” if government debts remain unsustainably high. “The risk for the Netherlands is that the problems will arise again in the monetary union, and we will once again have to contribute to the necessary solutions.’

Fabian Ambtenbrink, a professor of EU law at Erasmus University, is worried that the rules cannot be enforced. “The problem with the budget rules is that they have always not been enforced. The fines that formally exist is an empty threat.” In the new design, Member States could face a fine of 0.05 percent of their GDP if they don’t follow the rules instead of 0.2 percent. “The Commission’s argument is that these fines have never been imposed because they would be too high. That made me laugh.”

ING economist Bert Colijn is less pessimistic about the changes, calling them “better than we had,” according to the newspaper. “But they are still not waterproof.” He noted that the new rules state that Member States must reduce their national debts by 5 percent annually. “That is unrealistic and unachievable. This is only an agreement to look the other way together. That is not productive.”