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Sustainable public debt hinges on a sustainable world

Fiscal policy

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Finance Watch calls for EU policymakers to remove fiscal rules handcuffs to build a resilient future.

The following is a statement and quote by Finance Watch on the European Commission announcement today on the economic governance review communication and related reopening of the consultation.

Healthy public budgets go hand in hand with a healthy planet and economy.

Europe should meet the challenges of global economic uncertainty brought by Covid-19 and climate change by making fiscal policy serve as an agent for change. To achieve this, policymakers must rethink the rules on fiscal policy, quickly adapt the maze of outdated rules.

The communication released by the European Commission states a commitment to update EU economic governance rules, which must mean changing the EU fiscal framework to unlock public spending and investment that will spur a swift and much-needed transition to a sustainable future.

Citizens and civil society crave such a change. They will make their voice heard during the European Commission Consultation on the review of European economic governance. They know that a fundamental debate on fiscal matters will shape the financing of every public good and necessary public investment citizens and their communities need. That means outcomes that produce well-paid green jobs, lift millions out of poverty, and build future-focused infrastructure projects.

Much of the debate hinges on debt sustainability. It alone is not about reducing debt-to-GDP by cutting spending whatever the context, but also about precautionary investing to lower future fiscal risks. The Commission acknowledged in today’s communication that climate change threatens to impose enormous future costs that will ultimately be borne by public budgets and could therefore impact public debt sustainability – unless we invest today. Revamped fiscal rules should give Member States leeway to make the precautionary investments needed to lower surging climate-related fiscal risks.

On the eve of COP26, few still doubt that Europe faces serious environmental, economic and social challenges that require a rethink on public intervention. Yet however keen they are to act, European governments devise fiscal and socio-economic policies constrained by a self-imposed hodgepodge of EU-wide economic governance rules.

Research by Finance Watch outlines ways policymakers can forge a fiscal policy that builds-in resilience on many fronts:

  • Allow flexibility for precautionary green public spending. The Maastricht fiscal limits lack economic justification and suffer important conceptual flaws; public borrowing is the fiscally responsible course of action in a depressed and unsustainable economy with excess savings, historically low debt servicing costs, and important public investment gaps. Case in point, the Commission recognises that green and digital transitions alone will require an additional €650 billion per year until 2030 and will require nationally-financed investment.
  • Give a central role to broad-based Debt Sustainability Analysis (DSA) and do away with the debt-to-GDP ratio –  a poor indicator of debt sustainability. DSA is far superior as it accounts for all factors impacting debt sustainability, such as evolution of interest and growth rates and their differentials, debt composition, and the building up of fiscal risks.
  • Choose country-specific debt pathways based on these DSAs over a one-size-fits-all current debt-reduction rule. As recognised by the Commission, excessively large debt reduction could break the recovery as it would, in their words, “…entail a high and social economic cost and be counter-productive.”

As Europe pursues the fiscal reform debate, we urge an end to framing public budgets like household finances. At the same time, Europe must dismantle the inter-generational story that higher public debt levels present an unfair burden on future generations. This myth overplays the liability trope around debt while overlooking the presence of funding gaps that, if unbridged, will leave future generations worse off. Focus instead on investment that builds resilience, sustainability and full employment.

Benoît Lallemand, Secretary General of Finance Watch commented: 

“The current framework deserves the heaps of criticism hurled so far. EU economic governance, and particularly fiscal rules, ignore current realities and are blind to the nature and quality of spending by governments.

“Social and climate-related fiscal risks deserve the full attention of policymakers. We need to find ways to lower those risks by unleashing precautionary spending and investment that address them. Securing long-term sustainability is our duty vis-à-vis today’s youth and future generations – contrary to the fallacious argument that high public debt levels are a burden on them.”

Notes to editors: 

  • 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.
  • Finance Watch and the Fiscal Matters coalition: Finance Watch is a member of a coalition called Fiscal Matters that includes civil society organisations, think tanks and trade unions. The group  demands an overhaul of the current EU fiscal framework that prioritises debt reduction and balanced budgets over tackling long-term risks and challenges. That means prioritising important human, economic and environmental outcomes – such as creating well paid green jobs, lifting millions out of poverty, and implementing much needed sustainable infrastructure projects – as the backbone of tomorrow’s prosperity. Learn more
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