How to manage a high stock of public debt, increased significantly in order to face the Covid-19 pandemic, and return to less wasteful and rule-based fiscal policies, without hindering public investments that are supposed to allow the European Union to accelerate its transition towards climate neutrality?
This complex equation will be one of the central issues in the forthcoming reflection on the reform of the Stability and Growth Pact, the application of which has been frozen until the end of 2022.
Meeting in Brdo pri Kranju at the invitation of the Slovenian Presidency of the Council of the European Union on Friday 10 and Saturday 11 September, the European Finance Ministers began to clear the way for this thorny issue, even if the discussions will only really get to the heart of the matter when the European Commission officially relaunches the debates in the autumn, i.e. after the German legislative elections.
Internally, it has not yet specified the timetable, although there is talk of October. It has also not decided whether it will produce a new consultation document to update the one that initiated an initial reflection in February 2020 before the outbreak of the pandemic in Europe (see EUROPE 12419/4).
According to the Commissioner for Economy, Paolo Gentiloni, this debate should “take into account the situation we are in now, with a pandemic behind us and the climate transition ahead of us”.
The climate is once again favourable for reflecting on the reform of European fiscal rules. The strong economic growth observed in the second quarter (2.1% in the EU), thanks to the Covid-19 vaccination campaigns and the faster than expected return to pre-crisis status, allow States to shift their fiscal support from cross-cutting emergency measures to more targeted measures for the sectors that have suffered most from the pandemic, such as the restaurant and tourism industries.
From Slovenia, French Minister Bruno Le Maire said that France was ending the “whatever it costs” approach to tackling the pandemic that was allowed by the freezing of the Stability Pact. But Eurogroup President Paschal Donohoe reaffirmed that the euro area’s fiscal stance would remain expansionary in 2022.
In this sense, national public deficits will be less pronounced in 2021 than in 2020, although many of them are expected to remain excessive under the Stability Pact.
Reduction of public debt. With the average public debt of EU Member States rising from 79% to 94% of GDP between 2019 and 2021 (86% in 2019, 100% in 2021 for those in the euro area), the current path set out in the Pact appears even less realistic. It requires a euro area country to reduce its debt at an annual rate of 1/20th of the portion of its debt exceeding 60% of national GDP.
The pandemic has accentuated the “shortcomings” already observed before the pandemic, observed the European Commission’s Executive Vice-President Valdis Dombrovskis. “Clearly, there is a need to have a debt reduction path which is realistic for all Member States”, he added.
Some of the most indebted countries recognise the need to gradually return to fiscal discipline. “We need to return progressively to sound public finances, (...) but we should not kill the growth! (...) We will reduce the level of public debt from 116% of GDP in 2021 to 114% in 2022” and “the public deficit from 9% to around 5%” of GDP, said Mr Le Maire, judging certain rules to be “obsolete”, notably because of the sometimes very large gap between national public debts.
Spanish Finance Minister Nadia Calviño said that Spain, whose public debt stood at 120% of GDP at the end of 2020, hopes to start reducing its debt as early as 2021 thanks to very strong growth. His Belgian counterpart, Vincent Van Peteghem, said that Belgian debt, estimated at 114.1% of GDP at the end of 2020, was also a source of “concern”. But the most indebted countries are also demanding that their starting position be taken into account.
Other countries, especially those belonging to the group of ‘fiscally frugal’ countries, fear that relaxing the rules will ultimately undermine the credibility of the whole euro area. Eight Member States - Austria, Denmark, Finland, Latvia, the Czech Republic, the Netherlands, Slovakia and Sweden - have taken up the cause of fiscal responsibility.
“Sound public finances are a central pillar of EU membership and a foundation for the Economic and Monetary Union. Fiscal sustainability combined with reforms which support economic growth must continue to form the basis of the common EU economic and fiscal policy framework”, say the finance ministers of the eight countries in a letter to their counterparts ahead of the ministerial meeting. In their view, “reducing excessive debt ratios has to remain a common goal”.
Nevertheless, these eight countries are not opposed to a revision of the Stability Pact, provided that the reform leads to simplification, better implementation, and increased compliance with fiscal rules.
See the letter from the eight countries: https://bit.ly/2VwJeiX
Arriving in Brdo pri Kranju in the early afternoon, German Finance Minister Olaf Scholz said that the existing fiscal rules, which have proven their usefulness and “flexibility” during the pandemic, should be preserved. “Everyone knows that we have to return to the stability criteria, but everyone also knows that this requires a transition”, said the Social Democratic Party’s candidate for the German Chancellorship.
In July, the European Parliament took a position on the revision of the European economic governance framework. Building on the European Fiscal Board’s recommendations for differentiated treatment of public debt, it advocates an ‘expenditure rule’ that puts a ceiling on nominal public spending when a country’s public debt exceeds a certain threshold (see EUROPE 12758/4).
Green investments.
Another key part of the upcoming discussions is the reflection on how to stimulate public investment in the green and digital transitions.
“If we are serious about the climate transition (...), we will need to avoid what happened with the previous crisis, when public investment at the end reached level 0. This cannot happen again”, said Mr Gentiloni.
As a basis for ministerial discussions, a study by the Bruegel Institute, which estimates annual investment needs in the range of 0.5-1% of EU GDP, calls for a golden rule, which would allow investment in sustainable infrastructure to be excluded from the calculation of the budget deficit (see EUROPE 12787/2).
According to Mr Le Maire, this idea “deserves debate”. “Everyone must realise that the fight against climate change has only just begun, and that it will be very costly. (...) We will have to put a lot of money into new technologies, storage of renewable energies (...), nuclear power”, he said.
Later in the afternoon, the French Minister also established “a link” between the reform of the fiscal rules and the possibility of perpetuating the European Recovery Plan, insofar as it will be a question of finding the necessary financing for investments and innovation.
Germany has agreed to the Next Generation EU Recovery Plan, which provides for a common European debt, on the express condition that this initiative remains temporary.
Timetable. While it is assumed that the Pact’s opt-out clause will be activated until the end of 2022, it is impossible at this stage to say that a reform of the Pact will be finalised by then to come into force from 2023. Mrs Calviño would like this to be the case.
In contrast, the eight countries that signed the letter put quality before speed. They want to decouple the thawing of the Stability Pact at the end of 2022 from the discussions on its reform.
If the reflection that is underway leads to a legislative initiative, the timetable is tight. But if it simply results in an interpretative text from the European Commission, like the one on the flexibility of the Pact from January 2015 (see EUROPE 11229/13), then completing the whole process by the end of 2022 seems more feasible. (Original version in French by Mathieu Bion)