The European Commission on Tuesday (19 October) took another step towards reforming the EU’s much-discussed fiscal rules, including the bloc’s strict debt and deficit limits enshrined in the Stability and Growth Pact.
The Commission vice-president in charge of the economy, Valdis Dombrovskis, and the EU’s economic affairs commissioner, Paolo Gentiloni, presented the relaunch the EU’s economic governance review in Brussels on Tuesday (19 Octobre).
With a set of new questions, the Commission aims to get a feeling for which reform proposals might be acceptable to EU governments and other stakeholders.
The review is seen as crucial because the EU’s economic governance determines the fiscal leeway of EU member states when making decisions on spending.
Under current rules, public debt may not exceed 60% of a country’s GDP and yearly deficits should not exceed 3%. Additionally, there are limits on structural deficits and member states have to adhere to a debt reduction pathway if their debt levels exceed the EU threshold.
Learning from the pandemic experience
The commission originally launched the review at the beginning of 2020, but soon suspended the process because of the coronavirus outbreak. A general escape clause was activated and the rules were suspended until 2022, allowing EU governments full discretion to support struggling businesses and households.
But time has now come to think about reinstating the rules.
“We are now in a very different place than before the pandemic,” Dombrovskis said. “The crisis has also made some challenges more visible: higher deficits and debt, wider divergences and inequalities and a need for more investment. We need economic governance rules that can tackle those challenges head-on,” he added.
As the pandemic recedes, the EU’s fiscal review aims to incorporate the lessons learned from the pandemic. For example, one of the questions in the Commission’s consultation addresses the lessons learnt from the EU’s recovery and resilience fund.
Some countries like The Netherlands and Germany have made it clear that the fund should be considered an exceptional one-off event, while others like France and Spain would like to make common debt a permanent feature of the EU’s economic arsenal.
The economic governance framework has long been criticised for imposing austerity on countries like Greece and Italy, thereby stifling economic growth. Recently, even one of the architects of the EU’s fiscal rules called some of the rules “economically nonsensical” in today’s environment.
Boosting green investments
One of the Commission’s main objectives is to boost public investment in the green economy.
“We are relaunching this review of our economic governance against a backdrop of enormous investment needs, as the climate emergency becomes more acute with every passing year,” Gentiloni said.
According to the Commission, the fight against climate change will require additional investments of €650 billion per year, part of which will have to come from public coffers.
Dombrovskis said a “golden rule” for investments was part of the discussion, allowing some investments not to be counted towards the deficit.
In this review, there should be “no taboos,” Gentiloni concurred.
However, the review is not entirely devoid of taboos as it is still based on the premise that public debt levels should be reduced.
According to a senior EU official, it is clear that public debt levels should be reduced, even if the cost of servicing debt has gone down because of ultra-low interest rates.
Vice-president Dombrovskis referred to the challenge of ramping up climate investment while reducing debt levels as the “squaring of the circle.”
EU lawmaker Margarida Marques, author of the European Parliament’s report on the EU’s macroeconomic framework, criticises this insistence on debt reduction as “incoherent”.
According to Marques, environmental sustainability is at least as important as debt sustainability.
“If a green, social and digital Europe really are the priorities of the EU, we need to give member states the capacity to follow these priorities,” she said.
Growth as the common denominator
Commissioner Gentiloni agreed that public debt should be reduced but found that one “should not see the ghost of austerity behind this.”
He stressed the importance of economic growth, echoing the sentiment of Italian Prime Minister Mario Draghi who wants to “grow out of public debt” by focusing on productive investments.
Enabling growth-enhancing investments is a topic on which sustainability campaigners and business interests might also converge.
In a statement, campaign group Finance Watch stressed that the focus should be “on investment that builds resilience, sustainability and full employment.”
BusinessEurope’s Director General Markus Beyrer said that the focus should be on productive investments and “on the proportion of Member States’ expenditure towards growth-enhancing expenditures.”
The Commission will now gather feedback from the consultation process. At the beginning of 2022, it plans to provide guidance for the fiscal period ahead and inform about the next steps.
The EU executive also plans to communicate eventual plans to change the rules in time for 2023. Any proposal to change EU fiscal rules will be hotly debated as positions among member states differ substantially.
[Edited by Frédéric Simon]