Sunday, December 4, 2022

Brussels proposes new EU fiscal rules to turn the page on austerity

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The European Union appears ready to ditch austerity as it takes the first formal steps to reform the long-standing fiscal rules that rein in excessive government spending.

The legally-binding rules, which date back to the Maastricht Treaty in the early 1990s, compel EU states to keep their public deficit below 3% and their debt-to-GDP ratio below 60%, thresholds that many currently exceed by a significant margin.

The rules have remained suspended since the outbreak of the COVID-19 pandemic in March 2020.

A new proposal by the European Commission, unveiled on Wednesday afternoon, intends to open a new chapter and move past the contentious economic debates that have characterised the last decade.

“Almost all member states have broken the rules at one time or another,” Valdis Dombrovskis, the European Commission’s Executive Vice-President, told reporters. “And the rules have also become very complex.”

Under the Commission’s proposal, both the 3% deficit and 60% debt targets will remain untouched but greater flexibility will be introduced to adapt the goals to the specific circumstances of each country.

Capitals will be able to come up with their own blueprints to control public deficit and gradually decrease debt across a four-year period. Highly indebted countries might be granted an extra three years to adjust their finances.

The plans will be negotiated first with the European Commission and then approved by the EU Council, building upon the model used to unlock COVID-19 recovery funds.

The much-criticised norm that imposed a uniform 1/20th rate of debt reduction will be scrapped and replaced by country-tailored formulas, a tweak that can help avoid painful economic sacrifices.

The EU’s economy commissioner, Paolo Gentiloni, described the 1/20th rate as ”unrealistic” and said the new rules will recognise the reality of highly disparate debt levels across the bloc, which range from 182% in Greece to just 16% in Estonia.

“We preserve the intelligence of the rules,” Gentiloni said.

As a “counterpart” to this greater flexibility, Gentiloni explained, the Commission will strengthen the surveillance and enforcement of the fiscal rules, which has so far been weak and inconsistent.

EU countries will be therefore required to abide by the objectives that they have set.

In case of any deviation from the agreed-upon plan, the executive will apply financial sanctions, but the fines will be on a smaller scale to make them more “credible.”

Overall, all 27 countries will need to demonstrate their debt levels are on a “plausibly declining path” but will not be bound by a stringent deadline to reach the 60% target, which appears exceptionally distant for those who have seen their debts ballooned beyond the 100% mark.

“It is more a question of how each country gets there – and especially, how fast,” Dombrovskis said.

Brussels says no to ‘controversial’ golden rule

The EU’s fiscal rules have been the subject of intense debate since the 2007 financial crisis, which in turn triggered the eurozone debt crisis and challenged the viability of the euro as a single currency.

The perfect storm created by the COVID-19 pandemic, Russia’s war in Ukraine, record-breaking inflation, the energy crisis and an incoming recession has further fuelled the sense of urgency to reform the fiscal rules and bridge the North-South gap before it becomes insurmountable. 

The massive investment levels required to fulfil the green and digital transitions, estimated to be around €650 billion per year until 2030, have only strengthened the impression that austerity is a thing of the past.

The European Commission’s proposal, however, does not feature a so-called “golden rule” to exclude green projects from calculation of the 3% and 60% targets.

Dombrovskis admitted the golden rule had been “quite controversial” among member states, with “quite divergent views” expressed around the table.

“We try to avoid this as a ‘yes or no’ question,” Dombrovskis said.

Instead of the exemption, member states will be allowed to have more time at their disposal to decrease their debt burden if they commit to growth-friendly reforms and investments in common European priorities, the Commission’s vice-president explained.

“A golden rule is, of course, not [about] cancelling the debt,” Gentiloni said. “It is a way to have a different accounting of some part of the debt to facilitate investments.” 

Both Dombrovskis and Gentiloni defended the Commission’s proposal as a solid starting to point to kick start deliberations between countries, some of whom advocate for greater room of manoeuvre while others, fearing extravagant spending, continue to defend healthy and reasonable finances.

Discussions are expected to be protracted, heated and deeply influenced by the critical economic juncture afflicting the bloc.  

With Russian gas supplies vanishing overnight, the bloc is poised to face persistently high energy prices in the coming years, putting public coffers under extreme pressure.

The Commission intends to table a legislative text sometime in 2023, once member states converge towards a more unified position. The ultimate goal is to have the new fiscal rules in place before the start of 2024.

The EU fiscal rules, officially known as Stability and Growth Pact (SGP), were first introduced in 1997 in an attempt to bridge one of the bloc’s most glaring contradictions: a centralised monetary policy in the hands of the European Central Bank and a set of decentralised and dissimilar fiscal policies in each member state.

The rules were tightened several times during financial crisis and were abruptly suspended in March 2020, when the COVID-19 pandemic brought countries to a sudden standstill.

Their reactivation is now intrinsically linked to the progress of the reform process.

Numisteamone

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