EU fiscal rules, migrants and Belgium's trick

Source: EUobserver (EUOBSERVER) i, published on Friday, April 29 2016, 18:20.
Auteur: Sebastiaan Wijsman

The migrant crisis has been with us for years already.

Finally, in the autumn of 2015, governments started to complain about the cost of sheltering migrants while being constrained by European fiscal rules under the Stability and Growth Pact.

Accordingly, the European Commission granted flexibility and said that migrant-related expenditure will be exempted from the deficit ceiling and will not lead to sanctions.

In the past, I argued that this might be an effective measure for crisis management, but that it will be accompanied with creative accounting, moral hazard, and a democratic deficit.

However, the exemption also created another risk.

Belgium became an interesting case over the past few months. Like every year, the Belgian government fights against European fiscal rules and seeks solutions to prevent sanctions.

For 2015, the European Commission estimated in its winter forecast that the Belgian deficit will be around 2.9 percent of its GDP - only 0.1 percent below the 3 percent deficit ceiling.

At the same time, the International Monetary Fund estimated that the net cost of the migrant crisis for Belgium will be around 0.1 percent of GDP.

In other words, the migrant crisis could be pivotal for Belgium in terms of EU compliance. As a consequence, the Belgian government has a clear interest in the fiscal exemption.

For its part, the OECD i recently published a report on development aid in 2015 that revealed an interesting Belgian solution. The report shows that the Belgian government accounted almost half of its refugee costs - €202 million - as development aid. At the same time, it decreased its regular development aid by €526 million.

This means that Belgium financed the migrant crisis to a large extent by cutting funds intended for developing countries. In fact, it became the biggest recipient of its own development aid.

One might say that such a decision worsens the problems at the source of the refugee crisis. Decreasing aid for developing countries enhances the chance of oversees civil wars and famine, which might trigger new migratory movements.

The Belgian solution also has an interesting implication for fiscal compliance.

Under the promised flexibility, the commission subtracts the migrant-related expenditures from the Belgian deficit in its assessment. For instance, when Belgium has a deficit of 3.1 percent of GDP but a refugee spending of 0.1 percent, the commission will still consider Belgium as compliant.

This works if Belgium had borrowed funds to finance the crisis, but not under the current circumstances.

Since Belgium decreased its development aid, the migrant crisis did not contribute to a larger deficit. But by cutting development aid, the Belgian government will be rewarded with a lower assessable deficit.

The Belgian situation not only shows one of the side effects of flexible fiscal rules. It also shows how little room for manouevre governments have on unexpected expenditures.

As long as debt levels are high, the Stability and Growth Pact will remain a tough game between the governments and the European Commission.

Sebastiaan Wijsman is an economist at KU Leuven

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