On Tuesday 19 October, the European Commission gave a second boost to the reflection on the reform of the European economic governance framework with the Stability and Growth Pact at its heart (see EUROPE 12814/18). This reflection will take into account two overriding factors, which have become even more salient in the light of the Covid-19 pandemic, namely very high levels of public debt and the need to invest massively in the climate and digital transitions.
The communication adopted by the EU institution simply completes the one used to launch the first phase of the reflection in February 2020, which was stopped dead in its tracks by the outbreak of the coronavirus pandemic in Europe (see EUROPE 12419/4). Of the 11 questions posed to stakeholders, two are genuinely new, while one has been slightly reworked.
Although the world has changed completely since February 2020, the main conclusions on the functioning of the European economic governance framework made at the time remain valid, so “this communication is a complement to the one published in 2020”, confirmed an EU source.
“The main objective at this stage is relaunching the discussion”, confirmed Commission Executive Vice-President Valdis Dombrovskis. For the European Commissioner for the Economy, Paolo Gentiloni, “no taboos” should limit the scope of the reflection. The Commission’s stated objective is to first build a consensus on the diagnosis and avenues of reform before taking a formal decision, probably in spring 2022.
Mr Gentiloni noted that the ecological and digital transitions will require “€650 billion” of public and private investment by 2030. At the same time, the pandemic has further increased public deficits and indebtedness, with the average euro area debt reaching 100% of GDP by the end of 2020, and has tended to increase socio-economic divergences between EU countries.
The challenge is therefore to evolve fiscal rules so that they allow a sustained level of growth-enhancing investment to be maintained, while allowing Member States to put their public finances back on a sustainable path in the medium term. The Next Generation EU Recovery Plan and the 2021-2027 EU Budget are intended to take over and stimulate additional investment without further burdening national budgets.
According to Mr Dombrovskis, reducing public debt and boosting investment must “go hand in hand”. He also indicated that one of the questions raised concerns the creation of a ‘golden rule’ that would allow the exclusion of certain productive investments, such as environmental or social infrastructure, from the calculation of the public deficit.
Other relevant questions already raised in early 2020 include the issue of simplification of fiscal rules and ownership of rules at national level. On the second point, the Commission believes that inspiration can be drawn from the European Recovery Plan, through which States have presented recovery plans, negotiated first at national and then at European level, which receive financial support from the EU provided that investment and reform commitments are met.
On the other hand, the perpetuation of the Recovery and Resilience Facility, which allows the European Recovery Plan to be financed via debt at EU level, or the SURE instrument to support national short-time working schemes, does not seem to be on the table. For Mr Dombrovskis, the question of making these two temporary instruments permanent is “not part of the review”, while for Mr Gentiloni it is “perfectly legitimate”.
Uncertainty for 2023
There is still uncertainty about the nature of the fiscal rules that will apply in early 2023, when the freeze on the Stability Pact, enacted in spring 2020 to deal with the health emergency, ends.
In the first quarter of 2022, the Commission will present guidelines to help Member States prepare their stability and reform programmes for the following year. In particular, national authorities will have to indicate the extent to which they are replacing the emergency measures that helped fight the pandemic and keep the economy afloat with targeted aid to the most affected sectors and geographical areas.
This will be followed, “well in time for 2023”, by proposals to reform the European economic governance framework, Mr Dombrovskis said. “The exact sequence and nature of our proposals remain open questions”, he said. He considered the presentation and adoption of legislative proposals that would be applicable from the beginning of 2023 as “a real challenge”. Hence the possibility, according to the executive vice-president, of also presenting “an interpretative communication” on the Pact, similar to the one the Commission presented at the beginning of 2015 to stimulate structural reforms and facilitate public investment (see EUROPE 11229/13).
Mixed reception from S&D and Greens/EFA groups in the European Parliament
In July, the European Parliament had already taken a position on the reform of the European economic governance framework (see EUROPE 12758/4).
On the left of the political spectrum, the communication presented on Tuesday is considered too timid. “The Commission is missing the opportunity to clearly state that the current rules do not fit the current economic environment and challenges”, said parliamentary rapporteur Margarida Marques (S&D, Portugal). “The current set of rules cannot be applied while we are still reflecting on the new rulebook. We need to amend the Pact to provide country-specific adjustment paths of debt reductions allowing fiscal room for the necessary public investment”, she said.
The same is true of the Greens/EFA group. “This is not a time for fudging, but for major social and environmental action”, said Karima Delli (Greens/EFA, France). Her counterpart, Claude Gruffat, said it was essential to reform the Stability and Growth Pact “as a matter of urgency” so that it effectively finances ecological and social transitions.
See the communication: https://bit.ly/2Z73yZX
To participate in the public consultation: https://bit.ly/3aWHNOA (Original version in French by Mathieu Bion)