From bailouts to penalties: EU gets tough

SOMETIMES the world of the European Union works in mysterious ways. Hungary has become the first EU country to be penalised for failing to reduce its budget deficit. Greece, whose economy and public finances are in a worse shape than those of Hungary, has not only been bailed out twice, but also receives much technical assistance to improve the effectiveness of its policies and reform its public administration. How can both be happening at the same time?

The answer is that they are the two sides of the same coin. The EU employs both sticks and carrots to induce its members to place their finances on a sustainable basis.

Since July 2004, the Council of the EU has been recording that Hungary’s budget deficit exceeded the allowable threshold – 3% of GDP – and has been issuing successive recommendations to Hungary to take appropriate measures. In January of this year the Council again examined Hungary’s response and concluded that it was inadequate. Hungary claimed that it turned the budget deficit into surplus but in fact that was a temporary change. It was the result of a one-off increase in revenue. There was no structural and sustainable correction. So, eight years later and after several warnings that apparently went unheeded, the patience of the Council was exhausted. A week ago the Council decided to withhold, as of January 1 2012, €495 million from the money that had been provisionally earmarked in the EU’s Cohesion Fund for Hungary.

Unlike a fine that would have increased the strain on Hungary’s public finances and worsened the situation, this decision to withhold funds gives the Hungarian government one more chance to comply. The initial reaction from Budapest was not encouraging. There was defiance instead of contrition. But, of course, what a government says in public is not necessarily the same as what it actually does in private. Perhaps Hungary will make a real effort this time. After all, it is in its own long-term interest to bring its deficit under control.

The problem is that governments do not always do what is in the long-term interest of their countries. Governments do what is in the short-term interest of themselves, which usually means that they will take whatever measure they think necessary to get re-elected.

At the same time that the EU Council decided to penalise Hungary, the European Commission, which is the executive arm of the EU, published the second report of its task force on Greece. The EU, several member states and international financial institutions such as the IMF have set up a task force of experts to provide technical assistance to Greece. The purpose of this technical assistance is to identify where Greece experiences problems in implementing reform measures and to find suitable solutions.

The report makes for sobering reading. There are problems everywhere; the most serious being limited ability to collect taxes, weak controls on spending, poor coordination between ministries, heavy bureaucracy and excessive regulation. These are neither recent, nor unfamiliar problems. They have been sapping the productive capacity of the Greek economy and undermining the effectiveness of public administration for decades. Yet, it was convenient for successive governments to do no more than apply superficial remedies that were in many cases reversed by the next government. Reform was incompatible with the system of clientelism and patronage that sustained the political classes.

Although several other EU member states are suffering from the same problems, one wonders whether they are drawing any lessons from the predicament of Greece. A case in point is again Hungary. It has been in the spotlight not just for its inability or unwillingness to reduce its excessive deficit but also for the excessive political interference of politicians in its central bank, the judiciary, data protection agency and more recently its media watchdog. The increased political involvement in bodies that are supposed to be impartial and independent has been facilitated by laws that have been passed since the current government came to office. One can see why it is attractive for the government of the day to be able to exert influence. This, however, leaves a legacy that the next government will be eager to exploit itself, will become entrenched and in the long-term will erode the objectivity, stability and accountability that are the foundations of good policy making.

A debate dealing with similar issues is taking place in Cyprus. The Central Bank has been a thorn in the flesh of the government. The temptation for the government is not to renew the appointment of the awkward Governor. When a government protests too much about the views of independent institutions, I take it as a sure sign that those institutions do their job well. On the contrary, silence and tacit approval are good indicators of absence of critical thinking.

Hungary got another chance and Greece has its last chance to get out of the mess. Both are the result of action by the EU. The EU is not much loved by European citizens. Some of the criticism levied at it is surely justified. But the EU so far is the only real defence that citizens have against the excesses and abuse of power by their own governments.