The European Commission is of the view that, despite the differences between Member States, the European Union’s economic governance framework, with the strengthened Stability and Growth Pact at its heart following the sovereign debt crisis, has performed its function of ensuring the stability of public finances, by reducing public deficits and stimulating structural reforms, to good effect.
However, it acknowledges that European fiscal rules have been less successful in reducing debt and macroeconomic imbalances. The rules have also remained pro-cyclical, i.e., they have tended, for example, to amplify the economic downturn by imposing an excessive fiscal consolidation effort.
There is “reform fatigue”, noted Commission Vice-President Valdis Dombrovskis on Wednesday 5 February.
In the Commission’s view, EU rules can also be simplified and adapted to enable the EU to better respond to the economic context (with slowing growth and very low interest rates) and to achieve its policy objectives, including climate neutrality by 2050.
Taking advantage of the legal obligation to report on the legislative package (‘6 pack-2 pack’) that strengthened the Pact in 2011 and 2013, the European institution has therefore launched a review of the EU’s economic governance framework at the end of which it will take a position in the autumn on the way forward. This exercise will take place at the same time as the assessment of the monetary policy strategy recently initiated by the ECB (see EUROPE 12410/1).
We hope that this discussion, which will last several months, will be “results-oriented”, said Economics Commissioner Paolo Gentiloni. Referring to nine questions raised, he asked, for example, for stakeholders to comment on how existing rules function, how to avoid a pro-cyclical governance framework, how to stimulate structural reforms through incentives rather than sanctions, and how to simplify the regulatory framework.
Mr Gentiloni did not, however, deny the “extraordinary” effort that will be necessary to bring the positions of the players, particularly the Member States, closer together. The consultation period will aim to recreate “confidence” between those who advocate financial stability first and others, such as Italian Prime Minister Giuseppe Conte on Tuesday, who want to put growth first in order to “facilitate ‘green’ investment”.
The euro-area countries have been working for several years on deepening EMU – reform of the European Stability Mechanism, creation of a budget for the euro area, completion of the banking union – but are struggling to finalise the projects on the table (see EUROPE 12405/22).
During this period of reflection, the rules in force apply and, in particular, the 2015 interpretative communication on the flexibility of the Pact, which allowed many Member States not to recognise certain public expenditure in the accounting of their public deficit (see EUROPE 11229/13).
Golden rule One of the questions raised in this consultation is how to promote environmentally sustainable investments within the framework of the European Green Deal.
The question, according to Mr Gentiloni, is not whether to do it, but how to do it. In its country-specific socio-economic policy recommendations, expected by the end of February, the Commission will already take the climate factor into account, in particular by taking stock of the macroeconomic situation in the regions most affected by the transition.
However, since the European elections, the European social democratic family, to which Mr Gentiloni belongs, has been calling for a legislative reform of the Pact which also includes flexibility in the inclusion of social expenditure.
Legislation is certainly a possibility, but, according to a European source speaking on Tuesday 4 February, the promotion of ‘green’ investments can also be done by reinterpreting the 2015 communication. Is there a need for a permanent or temporary measure? How will the investments concerned be identified? These are all questions that the consultation will attempt to answer.
In October 2019, the European Fiscal Board called for the creation of a targeted ‘golden rule’ to protect productive public spending (see EUROPE 12360/5).
Another field of investigation: simplification
“Rules have become overly complex and hard to explain”, Mr Dombrovskis admitted. The Commission’s consultation document makes the same observation, especially with regard to the ‘preventive’ part of the Pact, with which countries with a public deficit of less than 3% of GDP must comply.
On this point, the debate focuses in particular on the advisability of continuing to base the macroeconomic analysis on indicators which are difficult to quantify but which are taken into account in determining the structural effort (budgetary consolidation excluding the impact of the economic cycle) to which the euro area countries must commit themselves.
Since data on structural balances tend to be “volatile”, we will discuss how to move from structural balance indicators to indicators related to public spending, the Vice-President said.
Finally, national budgetary frameworks are also subject to consultation, which have required, inter alia, the creation of independent entities in the Member States capable of assessing and making recommendations on the budgetary and economic policies of national governments. The Commission notes that these frameworks are very different due to minimum harmonisation at European level (Directive 2011/85 and Regulation 473/2013).
See Commission documents on the review of the economic governance framework: http://bit.ly/397KzOe (Original version in French by Mathieu Bion)