More flexible budget rules? The debate about this has only really begun

The belt is still loose for a while – but how tight will it be tightened again? As the economic recovery continues across Europe, the EU is starting to think cautiously about what’s next. And in particular: the future of European fiscal rules.

During the pandemic, those rules, known as the Stability and Growth Pact, were completely put out of action. In their simplest form, they are strict: a maximum government debt of 60 percent of gross domestic product and a maximum budget deficit of 3 percent. But even before corona, there was constant criticism: they are said to be too strict, too complex, hinder investments or are not sufficiently enforced. Northern and southern European countries are traditionally diametrically opposed to each other like hawks and doves in this discussion.

At the beginning of 2020, the European Commission already tried to start a broad discussion about the future of the rules – which was nipped in the bud by the virus panic. Now she wants to restart the debate, taking into account the “lessons of the corona crisis”. On Tuesday, she presented a series of questions to that effect, but without clear proposals. The discussion is far too fraught for that, and even within the Commission itself there is not in the least agreement on the best budgetary policy.

That is why Brussels is now opening a broad debate about the future of the rules, to which experts and citizens can contribute. In doing so, the Commission hopes to ‘build consensus’. In other words: to prevent or at least moderate the bloody fight that is expected over rule reform.

“Budget rules are only effective if everyone agrees with them,” emphasized Finance Commissioner Valdis Dombrovskis on Tuesday. But that agreement is still hard to find. These are the four main themes that will be discussed in the coming period:

1 Has corona not shown that more budget space is a good idea?

Faced with an unprecedented health crisis, EU governments have opted for unprecedented economic policies over the past year and a half. Everything was pulled out to keep companies afloat and thus cushion the economic blow. With success, the European Commission notes that counter-cyclical fiscal policy has proved ‘very effective in cushioning the impact of this exceptional crisis’. In addition, the EU guaranteed through a new instrument, the corona recovery fund, that the recovery was boosted through additional investment.

Read alsoAfter corona, the euro awaits a new battle

A decisive argument for permanently creating more budgetary space? That again is not. The Commission points out that the extraordinary situation also highlighted the importance of building buffers in better times. Moreover, several EU member states that are not in favor of more flexible rules have already emphasized that ‘the pact’ was flexible enough to allow for unprecedented spending.

2 Will investments be made in the climate in the future?

It is an amount that makes you blink: 520 billion euros. According to the Commission, this is how much extra investment, public and private, is needed each year within the EU to achieve the climate goals. Will that work if countries will soon feel bound by the budget rules again?

No, thinks a growing group of economists: if the budget belt is tightened again, climate investments will soon die. Especially because after the explosion, member states would have to cut back on corona expenditure in order to get back on track. “One of the legacies of the previous economic crisis was that the investment level fell to 0 percent,” said European Commissioner Paolo Gentiloni (Economics) on Tuesday. And so there has been talk for some time about a specific ground for exception for ‘green’ investments.

It is a proposal that can count on relatively strong support for the time being. That doesn’t mean the ‘green golden rule’ is a foregone conclusion. The question is, for example: how do you define such a climate investment? And: why not also an exceptional ground for strengthening defense – also an urgent task.

3 Couldn’t all those rules be a lot simpler?

In all the fierce discussions that await, almost everyone seems to agree on this: the rules should be simpler. After all, it is not the first time that the Stability Pact has been tinkered with. In fact, over the years so much has been tinkered with and patched up that a hyper-complex structure has been created in which hardly anyone knows the way. It also means that in the past a ground for exception could always be found if a country did not comply with the rules.

Simpler rules could, the Commission writes, help make Member States more willing to follow them and reduce ‘political enforcement costs’. No one can be against that. But budget hawks are wary of any simplification proposal. Doesn’t it secretly mean that wasteful countries can get away with more? When is a rule really too complicated, and when is it simply lacking the political will to comply with it?

4 What happens to all the debts that EU countries have built up?

Even before the pandemic pushed up public debt levels across the EU, the ‘debt standard’ of 60% of GDP seemed more like an unattainable dream for some EU countries. Italy was already above 130 percent debt in 2019, and countries such as France and Spain also touched almost 100 percent. After two years of corona policy, the group of countries that significantly exceed the standard is much larger.

Also read: Fiscal discipline first, or climate first?

The budget rules now state that a country must reduce its debt by one twentieth annually. But while the EU is still recovering from the corona shock, Dombrovskis acknowledged that would be “a major challenge for some EU countries”.

Director of the European Stability Mechanism (ESM) Klaus Regling showed himself in an interview with Der Spiegel less diplomatic this weekend. “If this were carried out to the letter, a state like Italy would have to achieve a budget surplus of 6-7 percent annually. This is not feasible and it makes no sense.”

Regulation’s criticism is widely supported. There are many voices within the EU in favor of a slower path, or a country-differentiated path towards the sixty percent standard.

But ‘strict’ member states such as the Netherlands and Germany object that debt levels really need to come down, and that member states have already failed to adhere to the twentieth rule.

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