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“Soft” Budget Rules

Similar to the soft budget constraints (or SBC) under former socialist countries, the budget rule under EU treaty is also “soft” in a sense that violating the rule won’t be really punished. Punishments, such as kicking the “rogue” member country out of the union, run contradictory to the political ambition of the European Union and would risk breaking the union altogether.

The other option is to rein in the government spending of the member countries. But that would require a centralized authority with direct control of the member countries, especially on their fiscal policies, i.e., how governments spend their money.  At current stage, Europe is not ready for such radical change, which requires a big surrender of their own sovereignty.  So what Europe will likely end up is a fake fiscal union with soft budget rules.  The moral hazard problem is unsolved.  Rest assured to see more budget rule violations in the future.

The following map from WSJ gives a very nice summary of how the union’s budget rule had been violated in the past.

[singlepic id=24 w=400 h=300 float=]

Link to the article.