The EU’s budgetary rules have long been a bone of contention between the Union’s fiscally conservative northern states and the reputedly more spendthrift southern states. COVID and the public spending that it necessitated has underlined the urgency for a review of the Stability and Growth Pact (SGP).
Last autumn saw the opening of discussions on possible ways the SGP could, in the words of Paolo Gentiloni, the EU’s economic chief, be “renewed and reviewed”. Given that the fundamental goals of keeping public debt at 60 per cent of gross domestic product and deficits to three per cent are enshrined in the EU treaty, the European Commission is unlikely to aim for any treaty changes.
Gentiloni is right when he implies that the unwritten economic strategy of “low for long situation” that the EU seems to be following is not sustainable. Low inflation, low growth and low-interest rates have been the driving forces behind the Union’s economic performance for more than a decade. These forces are beginning to change as inflation has reached significantly high levels; the NextGeneration EU plan aims for substantial investment in the green and digital economy; and interest rates are likely to start rising later this year.
The economic think tanks within the EU institutions are working on changes in the SGP rules that member states could agree on before the end of the French presidency in June. The prevailing reform proposal seems to be that which would introduce a “golden rule”. This rule would exclude some specific growth-enhancing public expenditure from the ceiling on spending growth.
Pascal Canfin, a French MEP from Macron’s party, tried to blunt the less agreeable consequences of such a rule by proposing a cap on the green spending exempt from debt and deficit calculations.
Canfin argues that an annual limit of one per cent of a country’s gross domestic product was a suitable figure to help plug the “green investment gap” needed to meet the EU’s ambitious target of net-zero carbon emissions by 2050. He insists: “We need a cap that is politically acceptable for all countries on what spending gets special treatment.”
Populist parties will want the current fiscal rules to be liberalised to the extent that will make them even more popular with their electorate
Still, political acceptability by all member states will continue to be a stumbling block to the reforms needed in the SGP to upgrade the EU’s economic governance that remains weakened by structural defects. While the majority of EU member states agree to a monetary union, an EU comprehensive fiscal union remains a mirage that will continue to undermine the stability of the Union.
The EU’s human resources and budget commissioner, Johannes Hahn, insists that stripping out certain public debt categories from national budgets would damage transparency and overcomplicate EU rules on countries’ borrowing limits. He argues that member states must focus on reducing their indebtedness, adding: “I am not supporting any ideas to exclude certain kinds of debts, qualifying them as good ones, sustainable ones, etc. At the end of the day, debt is debt.”
If Hahn’s ideas find support in the Commission and Council, member states could face regular “stress tests” of their public finances. The Commission’s executive vice president, Valdis Dombrovskis, who with Gentiloni is tasked with overseeing the consultation on the SGP review, insists that member states will still need to offer “credible” plans to cut their debt even if they get extra leeway for green investments.
To avoid fudging by some member states who seem to have a private guidebook on bypassing EU fiscal rules, Hahn has indicated that he was open to changes to the SGP as long as “country-specific, tailor-made road maps” defining specific targets to public debt reduction would become mandatory. He insists: “The Commission has to be tough in monitoring, checking and taking remedial action in case the road map is not respected. In terms of transparency, it is obvious we should have a clear picture of the situation of each member state.”
Populist parties will want the current fiscal rules to be liberalised to the extent that will make them even more popular with their electorate. French President Emanuel Macron will want to be seen to favour a loosening of fiscal rules at a time when he will be undergoing a crucial electoral test.
As long as the EU remains a loose union of member states with different economic prospects, different standards of governance, different fiscal rules and a general preference to put national interests before Union interests, it will struggle to gain the economic clout of China or the US.
Monetary union will never be enough to promote robust economic growth.