After hesitating for some time, over the failure of Spain and Portugal to conform with Europe’s budget rules, the European Commission arrived at a decision to assess the countries’ excessive borrowing in July.
Experts believe that’s the problem with fiscal rules that are difficult to enforce. Europe requires a comprehensive reform of its unsuccessful fiscal structure, but it does not have the required political resolve and widespread support. Until this changes, it would be difficult to encourage investment.
According to the European rules, budget deficits should not be over 3 percent of national income. At present, Spain has a budget deficit of 5.1%, while Portugal has a budget deficit of 4.4%. Again, nations are required to maintain public debt at no more than 60% of income.
Among the 28 EU members, just three have constantly complied with both rules. At present, nine nations are subject to the provisions of the excessive deficit procedure.
This would result in fines of nearly 0.2 percent of the gross domestic product. Completely revamping the fiscal system needs a change in the thought process. The policy makers must concentrate on the basics of the economy.
They must also establish a restricted form of fiscal union for nations that are members of the euro zone.
The EU must focus on two less fundamental methods. In the first place, boost public investment. It is evident that the net public investment in several EU nations has been low for a long time and particularly since the financial crisis.
Any additional infrastructure investment would generate demand in the short period and increase growth in the long-term.
The EU should also quicken efforts to establish a unified market for capital and equities. This would be the most optimal method to enable the EU to negate economic shocks. This is more effective than the operating fiscal union.
It needs a committed attack on regulatory restrictions to capital flows within the EU, integrated insolvency laws, and other measures.
The EU should focus on investment. The correct public investment would make the EU very popular.