Sunday, January 18, 2015

Relaxing State Deficit Restrictions: Power-Grab by the European Commission

As the World Bank came out with its revised prediction of 1.1 percent economic growth for the E.U. (“eurozone”) in 2015, down from the earlier estimate of 1.8%,[1] the European Commission announced that it would allow states more leeway in meeting the federal requirement that state budget deficits be no more than 3 percent of their respective economic outputs. Lest this appear as a sign of political impotence, the “strings” demonstrate the opposite.

The Commission announced in January 2015 that states would be permitted to “stray from previous deficit-reduction commitments if they adopt structural reforms such as changes to labor rules that make it easier for businesses to hire and fire workers.”[2] At the time, the World Bank pointed to a lack of economic competitiveness as one reason for the languid growth expected in the E.U. It “is struggling to avert a third recession since the financial crisis as the currency union grapples with high debt and a lack of international competitiveness.”[3] To be sure, labor flexibility can enhance such competitiveness, yet structural labor reforms pertain to labor policy—something that a legislature, either federal or state—should presumably undertake. The Commission is the E.U.’s executive branch. In making significant labor reform a requirement for state governments having trouble meeting the 3 percent limitation, the Commission is demonstrating the power that it, and thus the E.U., has relative both to other federal institutions and the states.

To be sure, a more competitive E.U. internationally is in the states’ interest too. Indeed, state legislators could use the federal requirement as political cover when facing pressure from labor unions. Furthermore, the Commission also announced that states facing “very hard times” economically, such that they “have gaps between actual economic output and potential output of between minus 3% and minus 4% of gross domestic product, wouldn’t be required to cut their deficits at all, and only by 0.25% of GDP if their debt is over 60% of GDP.”[4] To state legislators in such troubled states, having to enact some structural labor reforms that would enhance economic competitiveness might be an easy sugar pill to swallow.

In short, the European Commission did not capitulate to wayward states by easing pressure on them to keep their respective deficits below 3 percent of economic output; rather, the federal institution used its power to interpret the law in a more lenient way to gain power in the domain of labor policy both from other E.U. institutions and the state legislatures.

[1] Ian Talley, “World Bank Lowers Global Outlook,” The Wall Street Journal, January 14, 2015.
[2] Matthew Dalton, “EU Eases Pressure on Nations’ Budget Deficits,” The Wall Street Journal, January 14, 2015.
[3] Talley, “World Bank Lowers.”
[4] Matthew Dalton, “EU Eases Pressure.”