Europe Still Dodging Fiscal Challenge

By RICHARD BARLEY
The financial crisis has exposed deep flaws in the euro zone's fiscal arrangements. The Stability and Growth Pact, already damaged by failures to enforce sanctions pre-crisis, failed to provide sufficient discipline. The European Commission on Wednesday set out new proposals to improve economic governance and coordination. But on their own, they won't solve the problem. The system still needs a proper overhaul.

European Commission President Jose Manuel Barroso, left, and EU commissioner for Economic and Monetary Affairs Olli Rehn, right, give a joint press on the " Reinforcing Economic Governance " at the EU headquarters in Brussels on May 12.

There are some sensible ideas. The commission is right to argue that the excessive deficit procedure could be triggered not only by a deficit of more than 3% of gross domestic product but also by persistently high debt levels, or a dangerous combination of the two: Greece has shown the peril of a debt snowball. Similarly, it has sensible proposals for a broad early-warning mechanism that would look at private-sector credit supply and asset prices, as well as imbalances between countries with current-account surpluses and deficits. But, disappointingly, it appears there is no change to the sanctions to be imposed for breaching the rules, although their imposition could be speeded up.

Other proposals simply throw into sharp relief the lack of political union that has underpinned and arguably exacerbated this year's sovereign-debt crisis. The commission proposes peer review of national budgets during formation in order to identify common European objectives that could be embedded in domestic policy making. That would be helpful, and peer reviews may prove more effective in the wake of the Greek debacle; there is now clear self interest in thinking of the common good. But politicians have short tenures. To be truly effective, national governments would have to countenance some constraint on their fiscal sovereignty.

This is no academic debate: The crisis will leave many euro-zone states, including France and Germany, with high debt levels that mean further shocks could prove dangerous. The $1 trillion euro-zone rescue package embeds some of the needed steps; in extremis, countries must submit to International Monetary Fund and European scrutiny and direction to win funding. That has had an effect, with Spain, Portugal and others speeding up their fiscal efforts. But more is needed. Wednesday's proposals stop short of an effective preventive mechanism to stave off future crises.

Write to Richard Barley at richard.barley@dowjones.com