MNI INTERVIEW: EC To Go Easy On Fiscal Rules Due Sell-Off Fear

MNI (BRUSSELS) - The European Commission is likely to go easy on enforcing EU fiscal rules on high-debt states for fear of sparking a fire sale of government bonds, European Parliament Budgets Committee Chair and former Belgian Finance Minister Johan Van Overtveldt told MNI, who added that "the Commission does not carry a big stick.” 

“Either the Commission accepts what these countries are proposing or the Commission will push for tougher proposals. If you go into that scenario there is a huge risk you might ignite at that moment or during that discussion the very crisis you want to avoid," he said.

“Markets may say, this country has a huge deficit or debt so let’s get rid of the bonds of country X or Y. It will be very difficult for the Commission to be stern vis-a-vis countries which don’t do enough to bring down their deficits.” (see MNI: EU Already Looking At Flexibility For France- Officials)

Van Overtveldt thinks it is more likely that the Commission will instead shift its focus to ensuring countries carry out the reforms which they commit to under the new fiscal plans.  The Commission is currently in bilateral talks with EU member states to finalise their medium-term fiscal consolidation plans with member states expected to submit their debt-cutting plans to the Commission from September 21.  

“If you read the small print of the new rules, if a country implements reforms they have a lot of leeway in terms of deficit development,” he says. 

DRAGHI REPORT

Turning to the Mario Draghi's looming report on the future of the EU's global competitiveness, the MEP fears that the former ECB president, supported by two-term Commission President Ursula von der Leyen, will come up with a much too dirigiste EU industrial policy, which will most likely involve significant amounts of EU-level funding.

Arguing that a good industrial strategy should just lay down the general framework and set out clear objectives and incentives to attract private capital, Van Overtveldt concedes that such an approach is unlikely to feature among Draghi's recommendations when he releases his report in mid-September.

“Unfortunately, the Draghi report will go in the opposite direction and say that governments and the EU must determine what to do and then put up the money to take the lead, a fundamentally wrong way to do it,” he said. (see MNI INTERVIEW: Draghi Report Likely To Call For EU Borrowing) “The current talk is all about creating the circumstances under which national champions can get even stronger.” 

CMU 

Van Overtveldt said Capital Markets Union ( CMU) is the key to financing Europe’s competitive future and the only way it can hope to compete with China and the U.S., claiming: “If you don’t do that you have lost a priori the competitiveness battle with China and the U.S..” 

He rejected an idea mooted by Draghi that a smaller group of EU states might move ahead faster on CMU, pointing to “free rider” risks. States not joining the lead group might still try and take advantage of the potentially profitable opportunities created by a unified capital market without bearing any of the regulatory or other burdens involved in creating or maintaining it, he pointed out.