A cornerstone of the European economic governance framework are the fiscal rules. These fiscal rules were established in 1992 when the EU member states enshrined deficit and debt limits in the Maastricht Treaty. In other words, the fiscal framework defines how much governments are allowed to borrow and spend, the objective being to contain some of the risks that come with being part of an incomplete monetary union, such as the risk of an economic crisis spreading from one country to another.
From the very beginning, EU fiscal rules have been prone to controversy and over the years, have undergone several reforms. A core area of contention is debt sustainability. Under the framework, member states are required to keep budget deficits below 3% of GDP and public debt below 60% of GDP. This overly rigid framework was largely responsible for devastating austerity following the global financial crisis. By choking off government spending following the 2008 crisis, aggregate demand fell, and economic output declined, which resulted in permanent economic scarring, reducing household income and stifling employment, particularly for those on the lowest income.
In response to the Covid-19 pandemic, policymakers took steps to avoid the mistakes of the past. The Stability and Growth Pact, one of the core components of the European fiscal framework, was suspended and the Recovery and Resilience Facility established, allowing governments to increase investment to support their economies through challenging times. In response to the economic impact of the war in Ukraine, the Commission decided to further extend the suspension of the fiscal rules until the end of 2023. While important actions were taken by legislators in the short term, recovering from the economic fall-out of the pandemic and this terrible war will require a fundamental overhaul of fiscal rules that are no longer fit for purpose.
The fiscal framework in its current form is blocking progress towards achieving our social and environmental goals. Today, the EU is in dire need of private, but also public investment. Pre-pandemic, the EU had a social infrastructure investment gap estimated at least €142 billion per year, which will have only become more severe. Given the climate crisis results in permanent effects, rather than temporary ones that can be remedied, preemptive spending and investments are needed to limit the worst effects of the Ecological Emergency. But the EU Commission’s most recent estimate of the ‘green investment gap’ is €520 billion per year. Other estimates suggest annual investments of up to €855 billion (excluding transport) in the EU27 could be required to tackle climate change alone (thus precluding investments needed to thwart wider environmental breakdown).
We have heard some positive signals from the Commission in the last weeks regarding significant reform of fiscal rules. The President of the European Commission, Ursula von der Leyen tacitly dissociated herself from the era of austerity by suggesting that the Covid spending packages not only offered a “boost to our economic confidence” but also a model for dealing with the present energy and environmental crises. As reported by Politico on 7 October, the Commission appears to be moving towards a country-specific debt “trajectory that allows adjustment in public finances, consistent with ‘good’ government spending and reforms, hand in hand with more enforcement”. The Commission has also indicated that it will get rid of a requirement to reduce debt by 5 percent per year if a country’s debt exceeds the 60 percent threshold.
Despite positive signals, concerns remain over how changes to the EU fiscal rules will be carried out. Changes to the fiscal framework will have a significant impact on our economies and societies for years to come. Risks exist that disagreement among Member States may lead the Commission to only suggest tweaks to the Stability and Growth Pact’s interpretative guidance. Reform of such importance must not happen behind closed doors and instead should follow a democratic and transparent process that includes a formal role for the European Parliament. In other words, it should follow the ordinary legislative procedure.
In the letter coordinated by Fiscal Matters, 180 unions, civil society, think tanks and academics make the argument that EU economic policy no longer delivers for the European people and nature with persistent inequalities, a growing green investment gap and ongoing environmental degradation. The letter argues the need to adopt a long-term economic mindset allowing the next generation to enjoy better public services, lower inequalities, and healthy ecosystems.
Ludovic Suttor-Sorel, Research and Advocacy Officer at Finance Watch and member of the Fiscal Matters steering group said:
“The European economic governance and its fiscal rules impact all of us, so it’s encouraging to have voices from across civil society coming together and calling for much-needed change. Rules can be changed to ensure long-term debt sustainability whilst also enabling a sustainable and just transition.”
Phillip Heimberger, Economist at the Vienna Institute for International Economic Studies and a signatory of this letter said:
“We need a thorough reform of the EU fiscal rules to give democratically elected fiscal policy-makers the best shot at meeting our economic, social and climate challenges. We need much more public investment over the next decades than we currently see, and we cannot achieve all this if we more or less stick to the rules status quo.”
The letter calls for the following principles to guide the reform:
- Build a future-proof economy with jobs for all – Allow fiscal flexibility to target a fully employed economy with decent and well-paid clean jobs available to all.
- Fill the green funding gap and make Europe energy independent from fossil fuels – Targeted and scaled-up green public investment is needed to remain below the 1.5 Celsius goal of the Paris Climate Agreement. A reformed fiscal framework should ensure the alignment of Member States’ public spending with the Paris Climate Agreement, as well as other environmental objectives including reducing resource use and zero pollution.
- Reinvest in public services and social protection – Social expenditure must guarantee universal access to quality basic public services, as well as a social safety net, so no one falls through the cracks and the care economy is central.
- Target human, economic and environmental well-being – Make durable well-being the primary objective of EU economic policy by establishing adequate indicators within the EU’s fiscal policy framework and making sure the rules do not translate again into austerity. Economic growth as a primary objective does not work and governments should rather aim to achieve improved human, economic and environmental outcomes.
The converging crises require a complete rethink of the economy. Rather than optimising outputs, we need a wellbeing economy, allowing everyone to enjoy a warm home, good health and a habitable planet. This starts with a European fiscal framework that prioritises long-term environmental and social sustainability over short-term thinking.
– Ends –
Notes to Editors
The Open Letter has been published on the European Youth Forum Website.
For further details on the changes to the fiscal rules being advocated for by Finance Watch, please read “Breaking The Stalemate: Upgrading EU economic governance for the challenges ahead”. For an introduction on the European fiscal framework, please read “One framework to rule them all“. To dive deeper into the three pillars of the European economic governance framework, please see our guide, “Navigating the Maze”.
Ludovic Suttor-Sorel, Research and Advocacy Officer at Finance Watch
As Research and Advocacy officer, Ludovic works on fiscal policy, sustainable finance, natural capital and the nexus between biodiversity and finance. Prior to joining Finance Watch, Ludovic was a researcher in applied economics at the Solvay Brussels Schools of Economics and Management (ULB), where he worked on public finance, environmental policy, public incentives and developed a keen interest in industrial policy. Earlier in his career, he was a political advisor for the top management of one of Brussels’ welfare institutions. He first developed an interest in financial and banking regulation while working for a Belgian senator on reform of the Belgian banking structure. He holds a B.A. in Political Sciences and an M.A. in European Studies from the Institute for European Studies of the Free University of Brussels (ULB).
Philipp Heimberger, Economist, Vienna Institute for International Economic Studies
Philipp’s research focuses on macroeconomics, public economics and international economics. He holds a PhD in economics from the Vienna University of Economics and Business. His experience includes a research position at the Institute for Comprehensive Analysis of the Economy (Johannes Kepler University Linz), where he has worked on macroeconomic divergence and structural change in the European Union, the macroeconomic effects of fiscal policy, and the coordination of European fiscal policies in conjunction with the problems related to estimating potential output.
About Finance Watch
Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.
About Fiscal Matters
Fiscal Matters tries to reform Europe’s fiscal rules by organising and elevating the voice of civil society through common actions like letters, events and media interventions. Fiscal Matters brings together academics, civil society organisations, think thanks and trade unions, deeply concerned that the current fiscal framework prioritises debt reduction and balanced budgets over much more important human, economic and environmental outcomes – like creating well paid green jobs, lifting millions out of poverty, and implementing much needed green infrastructure projects. Accordingly, we work collaboratively to overhaul the current approach to fiscal policy and reshape our economies and tackle the unprecedented challenges facing the EU head on. Members include the European Trade Union Confederation, the European Environment Bureau, the European Youth Forum, Climate Action Network Europe, Finance Watch, New Economics Foundation, Greentervention, Sustainable Finance Lab, ZOE Institute for Future-fit Economies, Social Platform.