In 2021, despite the strong economic recovery spurred by the lifting of anti-Covid-19 health measures, some EU Member States, especially those with already high debt-to-GDP ratios, increased public spending further “well above rates that can be expected to be sustainable in the medium to long run”, with some of this expenditure being introduced on a permanent basis, the European Fiscal Board notes in its 2021 activity report published on Wednesday 26 October.
Such a situation, made possible by the freezing of the Stability and Growth Pact until the end of 2023, shows “the need to clarify as soon as possible when and how to return to a rules-based approach”, said the Chair of the Board, Niels Thygesen.
The European Fiscal Board recommends reforming the EU economic governance framework by introducing differentiated rules for different Member States. For the most virtuous countries, monitoring would be take place mostly at national level. On the other hand, increased EU surveillance would be in place for the most indebted countries.
The latter would make commitments to reduce their stock of public debt “significantly over a period of 3 to 5 years”, as the ‘1/20th’ rule of the Pact, which has never been applied, is not politically viable. These commitments would be differentiated according to the fiscal situation of each country.
In addition, the Board suggests introducing ‘spending floors’ to stimulate public spending in priority areas. It uses the 2% defence spending target set by NATO for the Allies as an example.
Finally, as the NextGenerationEU Recovery Plan is seen as a one-off and temporary initiative, the Board reiterates the importance of having a permanent fiscal capacity at EU level to help Member States cope with large macroeconomic shocks, such as the Covid-19 pandemic.
On Wednesday 9 November, the European Commission will present its proposal to reform the European economic governance framework.
See the European Fiscal Board’s report: https://aeur.eu/f/3sv (Original version in Fiscal by Mathieu Bion)