The EU should rewrite its fiscal rules
This should be a good time to rethink the EU’s maligned fiscal rules. Many things have changed in recent years. Above all, the desire for public and private investment – to accelerate the decarbonisation of the economy as well as its digitalisation – is widespread, both in Brussels and in the national capitals.
The pandemic has also overhauled the old policy. The Rubicon of common borrowing for cross-border transfers has been crossed. The clear success of massive deficit spending in 2020 has reinforced the lesson that European policymakers began to reluctantly learn after previous crises: that a rigid approach to fiscal discipline hurts rather than helps fiscal sustainability. , economic growth and political cohesion.
A changing of the guard in important countries creates an opportunity to look at old issues with new eyes. The new government in Berlin seems committed to investment-intensive growth, both at home and in Europe. A similar opening can be detected in the Netherlands and elsewhere. Mario Draghi’s tenure as Prime Minister in Italy has reduced North-South mistrust. The same applies to the implementation of the jointly funded national recovery plans, widely considered (so far) to be a success, except for countries determined to undermine the EU legal order.
But no one would bet on a political deal being struck to overhaul fiscal rules, which are set to be reintroduced next year, after being relaxed at the start of the pandemic.
So we live with a double paradox. EU countries are collectively pursuing far better economic policies than they have for a long time. This is true in the short term – the effects of the pandemic on jobs, incomes and productivity have been far more minor and short-lived than we had reason to fear – and in their long-term ambitions. Yet, on both fronts, this progress would be held back by the current fiscal framework, in particular its drastic requirement to reduce the public debt burden.
Finance ministers are acutely aware of the risk of undermining the recovery by phasing out fiscal support too early – indeed, they have jointly recommended a “moderately supportive fiscal stance” for the euro area as a whole this year. And the commitment to invest in the green and digital transition, while ensuring it does not leave people behind, is strong. Yet the rules cannot simply be ignored in a union that is more a body of law than anything else.
There are three ways out of this dilemma. One is to subject economic policy to the old rules, assuming that the legal ties that underpin the European project must take priority. But the previous crisis showed that if you try that, you sacrifice both economic performance and political cohesion.
The next is to extend the rules enough to allow the desired policies. As German Chancellor Olaf Scholz likes to point out, the budgetary framework has proven its flexibility. His suspension could be extended. The European Commission has great power of interpretation and could issue more lenient guidance on how Brussels will judge whether national policies comply with the rules, rewarding growth-enhancing investment with fewer restriction requirements.
This carries its own risks. National governments find it convenient to relinquish any responsibility for EU-wide policy coordination; opposition parties would accuse them of caving in to Brussels. The finger pointing that divides other member states, which the pandemic has somewhat tamed, could easily escalate again. Something like this is, however, the most likely outcome if governments cannot agree on the third option: changing the rules altogether.
The reason this is so difficult is that there has been little clear thinking about what the rules are meant to accomplish. Traditional economic arguments seem outdated: the inflationary fallout from overspending has proven less risky than beggar-thy-neighbour austerity; the pressures on the interest rates of national borrowings are non-existent; and there are now bailout funds to deal with refinancing crises.
Likewise, current rules do little to address today’s greatest economic challenges, which, like it or not, call for more militant state policy and arguably more borrowing. public only when the rules were first developed. The best prospect for reform is for leaders to first agree on the rationale for the rules and derive new ones from an understanding of the economic policies that would achieve the broader sense of sustainability to which they are now engaged.
The proposal from France and Italy to promote certain types of investment has the merit of doing so. It is incumbent on those who oppose it to do the same.