European budgetary rules are holding it back – POLITICO
Arancha González is a former Minister of Foreign Affairs of Spain.
There is an American political axiom: “Don’t tell me what you like. Show me your budget and I’ll tell you what you like. The European Union has told everyone that it wants “strategic autonomy”. The coming months will show the world how serious it is.
Strategic autonomy means strengthening Europe’s capacity to make its own choices, in accordance with its interests and values, regardless of what others do. This is a reasonable response to a world that has become less friendly to Europeans – a world in which Russia has troops on the Ukrainian border, China is putting pressure on Lithuania, and the United States is withdrawing from Afghanistan. , leaving thousands of Europeans and their Afghan collaborators. failed.
But is Europe ready to do what it takes to increase its room for maneuver? It is far from clear.
The obvious example is that of defense spending. In the EU, this spending amounted to 1.2% of GDP in 2019, with only Estonia and Greece approaching NATO’s spending target of 2% of GDP. These spending levels seem to indicate a Europe that is comfortable with the continued dependence on the US security umbrella.
However, there is another area where the EU depends on the choices of others rather than its own: the economy.
Since the 2008 financial crisis, the EU has become increasingly economically dependent on the rest of the world. Until the crisis, the balance of the euro zone’s accounts with the rest of the world was neutral. Despite large internal imbalances, the net value of its exports was roughly equivalent to the value of its imports.
But the response to the crisis, mainly in the form of austerity measures, suppressed consumption and investment in much of the eurozone’s periphery. Economies like Spain, Italy and Ireland have gone from trade deficits to trade surpluses. The euro may have been saved, but Europe is now relying on external demand to spur growth and job creation. In the first quarter of 2021, the EU account surplus amounted to 3.4% of GDP. This dependence weakens Europe’s ability to act on its own. A premature return to austerity, with the end of exceptional spending related to the pandemic, would only make the problem worse.
The ongoing review of the EU’s fiscal rules provides a key test to determine whether it is ready for change. Here, there are roughly two camps:
The first wants to preserve the status quo. He argues that the exceptional measures taken over the past year – the emergency suspension of EU fiscal rules allowing member countries to further support their economies and the joint issuance of debt to finance the NextGenerationEU stimulus fund 750 billion euros – were only a temporary solution to a temporary crisis.
This camp would like to see the Stability and Growth Pact come back in 2023 – bring budget deficits below the stipulated ceiling of 3% of GDP and quickly reduce debt-to-GDP levels by over 60% – or face a fiscal tightening through excessive measures by the European Commission. deficit procedure.
The second argues that the pandemic has simply exposed pre-existing loopholes and that the EU’s fiscal framework should be overhauled and reformed to support investments in decarbonization, technology, infrastructure and defense. He wants to build on the EU’s pandemic experience in fiscal solidarity through mutual borrowing, as well as towards a health union with joint vaccine purchases and research and development spending.
This camp is not necessarily looking for a complete renegotiation of the Stability and Growth Pact, but it wants to exclude investments in green and digital transitions from the debt and deficit targets of member countries. And with the EU’s public debt at 93% of GDP – more than 100% in the euro area – this does not encourage a sharp turn in growth towards austerity, especially if it comes at the expense of investments improving productivity in human and physical capital.
Those seeking strategic autonomy must hope that the reformers win.
The reluctance of Germany and other core eurozone countries to borrow money and pool debt has not only limited opportunities for investing in digital and green infrastructure, it has also limited the internationalization of the euro, because unlike US Treasuries, there are no huge pools of safe euro-denominated assets that foreigners can hold.
The resulting dollar dominance in global payments, and the resulting centrality to the US financial system, is an important reason Brussels could do so little to protect European companies threatened with US sanctions over the Iran nuclear deal. .
The new German coalition government seems more willing to invest, at least at home. And if Europe can redefine its budgetary priorities and continue on the path of internal reforms, it has the opportunity to boost future productivity, sustainability and security, while reducing the continent’s vulnerability to external economic shocks. Low borrowing costs and higher than expected social costs of carbon mean these investments are likely cheaper than policymakers realize. But they will demand that the EU decide what it values and budget accordingly.