The EU economy has emerged from the shadow of COVID-19 with a spring in its step, thanks to strong policy support and a successful vaccination campaign. Uncertainty and risks remain high but the recovery is now taking hold. In fact, growth this year may well exceed our July forecast of 4.8 per cent and unemployment is almost back at pre-pandemic levels.

As we enter calmer waters, it is time to restart the debate on Europe’s economic governance, which we had to put on hold last year owing to the pandemic.

We need a healthy and inclusive debate to ensure that these rules reflect the changed economic reality and can equip us for the future.

When we first launched this review back in February 2020, we painted a mixed picture of the existing framework’s track record.

There were notable achievements. It had helped to keep public finances under control: in particular, the three per cent deficit threshold became a yardstick to avoid excessive deficits. It also helped to correct external deficits, which were one of the factors triggering the euro area crisis in the early 2010s. And it provided an essential framework for the coordination of economic policies.

But we also noted shortcomings: debt remained stubbornly high in a few countries, fiscal policies remained procyclical and adjustment was often achieved by cutting public investment. Many EU countries also faced low potential growth and persistently low inflation. Another issue was the complexity of the EU’s fiscal rules, which made them less transparent and hampered political ownership in our capitals.

These issues have been brought into sharper focus with the unprecedented crisis. And there are historic developments which we must also take into account.

First, investment needs have become more urgent. We now estimate the additional private and public investment needs related to the green and digital transitions at nearly €650 billion per year until 2030. The green transition alone accounts for €520 billion per year. Take just the energy and transport sectors, which will require an estimated €390 billion per year, 50 per cent more than in the past.

The Recovery and Resilience Facility will go quite a way to address these needs: it will provide member states with €338 billion in grants and up to €386 billion in loans between now and 2026. But we should now reflect on how national policies can most effectively facilitate these investments, which will have to be financed by both the private and the public sector.

COVID-19 deepened inequalities and worsened some weaknesses

Second, EU governments have spent almost 19 per cent of GDP to deal with the health and economic crisis caused by COVID-19, facilitated by the activation of the general escape clause of the Stability and Growth Pact. This fiscal support, coupled with powerful monetary support provided by the European Central Bank, proved vital for Europe to weather the storm.

But it also drove up debt and deficits in the EU. This is why a key aspect of this review will be to consider how our fiscal rules can ensure a gradual reduction of the debt-to-GDP ratio. This matters because sound public finances will allow us to adequately respond to possible future shocks and they will support sustainable growth by keeping financing costs low.

Third, the COVID-19 crisis has deepened inequalities and made some existing weaknesses worse. Private debt has increased. Dynamic house price trends have persisted and mortgage debt has risen significantly in some countries. Current account deficits have widened in countries dependent on tourism and the correction of current account surpluses has stalled. The pandemic will continue to change our economies and new risks may emerge. So, we should reflect on how the economic governance framework can best address these challenges.

Between now and the end of the year, we encourage views and contributions to this discussion. The Commission will then provide guidance in the first quarter of next year on fiscal policies in the period ahead. This guidance will reflect the global economic situation, the specific situation of each EU member state and the discussion on the economic governance framework.

We will provide orientations on possible changes to this framework, with the objective of achieving a broad-based consensus on the way forward well in time for 2023.

The European economy is recovering. But we must ensure that its growth is both sustained and sustainable in the coming years and beyond. Achieving that is our joint responsibility: the debate on how we do so starts now.

Valdis Dombrovskis is executive vice president of the European Commission. Paolo Gentiloni is European Commissioner for the Economy.

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