On Tuesday 19 October, the European Commission will relaunch the review on the future of the Stability and Growth Pact in the light of the experience gained at the height of the fight against the Covid-19 pandemic (see EUROPE 12805/6).
The Communication it will adopt on this occasion will complete an exercise first initiated in February 2020 (see EUROPE 12419/4). It will take stock of the fiscal situation in the European Union, marked by a sharp increase in the public debt necessary to deal with the health emergency and to maintain a stagnant economy on life support. Public debt has now reached 160% of GDP in Italy and 200% of GDP in Greece, for example.
In contrast to the austerity imposed after the 2008 financial crisis, spending without really counting has been one of the keys to saving lives and promoting a rapid recovery of economic activities as health measures have been eased.
This wide opening of the fiscal floodgates was made possible by the activation of the general escape clause of the Pact in spring 2020. This unprecedented decision by the Member States bears witness to the flexibility that already exists in EU law. It was accompanied by the ECB’s very accommodating monetary policy which maintained very favourable financing conditions for economic actors.
Beyond the budgetary emergency, all Member States now recognise the need to gradually put their public finances back on a consolidation path. In particular, this means replacing cross-cutting fiscal aid with aid that is more targeted at the sectors of activity and/or geographical areas most affected by the pandemic. Financed by a common debt, the Next Generation EU Recovery Plan should also help to maintain the level of investment without further burdening national debt.
In addition to simplifying the rules, the forthcoming reform should aim at reducing public debt in a consistent manner and take into account the different starting points of the Member States.
Having steered the European Parliament’s report on the revision of the European economic governance framework (see EUROPE 12758/4), Margarida Marques (S&D, Portugal) told EUROPE: “The last crisis has shown us that premature fiscal consolidation has serious repercussions on the economic and social fabric of our economies. By reopening the public debate, we have a unique opportunity to find a consensus on what the new post-Covid-19 normal is and how to provide fiscal space for investment to support a green and fair transition”. “It is of utmost importance to ensure predictability and stability during the recovery phase”, she added.
In their report, MEPs base themselves on the recommendations of the European Fiscal Board (see EUROPE 12585/22). They say that an expenditure rule capping nominal public spending when a country’s public debt exceeds a certain threshold can increase the transparency of fiscal rules in the Union.
Stimulating ecological and digital transitions
Another unavoidable challenge is the need to take into account the objectives of ecological and digital transition, which will require colossal investments in the next decade.
On the left of the political spectrum, several political forces are already calling for environmental and social infrastructure investments to be excluded from the calculation of the public deficit. Others fear opening a Pandora’s box where each country would ask to exclude from the Pact the fiscal expenditure that suits it, such as defence.
On Tuesday, the Commission is not expected to set out a specific course of action for reform, the aim being to seek the views of stakeholders first. On the basis of the feedback received, it will present a proposal in early 2022. Its aim is to reach a solution “well in time for 2023”, said its president, Ursula von der Leyen, in mid-September during the State of the Union address. However, the option of a comprehensive legislative reform to be adopted by co-decision between the European Parliament and the Council of the EU would make this timetable very ambitious.
Eight Member States that are primarily serious about budgeting have stressed the importance of prioritising quality over speed in thinking about fiscal rules (see EUROPE 12788/1). (Original version in French by Mathieu Bion)