It’s been 25 years since the signing of the Maastricht Treaty, which among other things included provisions that have to be met to join the euro. After all these years, however, they have proved to be mere paper tigers.The two most important elements of these provisions – known as the convergence criteria – concern fiscal discipline, mandating member states to limit their annual budget deficits to less than three percent of their respective economic output while instructing them to hold their national debt to under 60 percent of gross domestic product (GDP). Germany was the driving force behind the inclusion of these provisions in the agreement, even though the “three percent rule” on budget deficits had originally been conceived by a young French official.
Guy Abeille, a low-ranking employee in the French finance ministry, was tasked in 1982 to come up with a way to control the problem of runaway fiscal deficits, a product of then French President Francois Mitterrand’s expansive spending policies.
The French government’s budget deficit at the time roughly amounted to 2.6 percent of GDP. Abeille therefore was of the view that a one percent ceiling on the deficit would be unrealistic; even adhering to a two percent ceiling would be an onerous task for the government. That’s why he suggested a three percent upper limit, the simple and arbitrary manner in which the rule came into being. It was then later incorporated into the Maastricht Treaty as an important criterion that has to be met by potential member states to join the European monetary union.
Even the rule on keeping the level of national debt below 60 percent of GDP was arbitrary, says Oliver Sivering of the College of Public Administration and Finance in the southern German city of Ludwigsburg. In the early 1990s, many countries’ debt levels were around 60 percent of GDP. The two figures were then intertwined to come up with the debt and deficit rules, Sievering told DW.
“If the economy grows nominally by five percent, the new debt may rise by three percent. And this was used as the basis for coming up with an upper limit on debt of 60 percent of GDP.”
But it quickly became clear that achieving an annual growth rate of five percent was far from realistic. It was also evident that countries like Belgium, Italy and Greece wouldn’t be able to meet the 60 percent target. As a result, one had to just take comfort from the fact that the debt situation of these countries was moving in a positive direction and focus on the three-percent-deficit target.
A convergence report published in 1998 by the European Monetary Institute shows that except for Greece, all other potential eurozone candidates showed a fiscal deficit of less than three percent of GDP.
Some countries, including Germany, resorted to a number of tricks to show that they complied with the requirement. For instance, the German government sold shares in firms like Deutsche Telekom and Deutsche Post to the state-owned development bank KfW, in a bid to show that it reduced its debt level. Italy, meanwhile, introduced a European tax on its citizens only to repay most of it after the introduction of the euro.
Not a good example
The two Maastricht criteria are meant to be respected even after entering the eurozone club, to guarantee the solidity of the currency and the monetary area.
Germany, in particular, has always insisted on their compliance. However, Europe’s largest economy, together with France, violated the deficit limit in 2002, and yet both Berlin and Paris managed to avoid paying billions in fines and soften the strict rules.
“Since then, it has been quite detrimental to budgetary discipline in the euro area, as it gave a chance to other countries to say: if Germany and France do not adhere to the criteria, why should we stick to them?” noted Sievering.
At the height of the financial crisis, almost all countries exceeded the budget deficit target.
Although most eurozone countries have managed to rein in their deficits, they still have a long way to go when it comes to their debt. In 2015, for example, it was only Latvia, Lithuania, Estonia, the Czech Republic, Slovakia and Luxembourg whose debts were below the 60 percent threshold.
While Germany recorded a budget surplus again in 2016, its national debt was hovering around 70 percent of GDP, way above the prescribed limit.
Although the Maastricht criteria have been violated innumerable times, no penalty has so far been imposed on any violator. “No one wants to impose a fine on the other, because every country knows that in a few years it could face a similar situation and would be glad if it were let of the hook,” underlined Sievering. In other words, potential perpetrators judge current culprits.
Despite the ineffectiveness of the compliance mechanism, the economist views the rules as indispensable. He points out that just paying attention to the criteria and discussing about them have a disciplining effect.