09 Dic The missing debate in the review of the fiscal rules

The European Commission has recently published a Communication on the reform of the EU economic governance framework, focusing mainly on reviewing the fiscal rules and the surveillance system. This text precedes a legislative proposal, which we expect to be adopted in the first quarter of 2023. Generally speaking, the reform that has been put forward in the Commission’s Communication is reasonable and necessary. According to the current rules, public debt must be reduced at an annual rate of one-twentieth of the difference between the actual debt-to-GDP ratio and the 60% debt-to-GDP ratio set by the Treaties. In the Communication, the Commission removes this quantitative benchmark, which will clearly be impossible to meet when the general escape clause is deactivated, presumably in the preparation of the 2024 budgets. The new rules would see us move away from concrete figures for public debt reduction commitments. Instead, this mechanism is replaced by a bilateral negotiation framework between each Member State and the Commission. The EU executive body and national governments would negotiate a multi-annual debt reduction plan together, which would then be approved by the economic and finance ministers in the Council of the EU.

Undoubtedly, the proposal means increased flexibility compared to the current rules. However, it also grants a certain level of discretional power to the Commission, which should go hand in hand with greater scrutiny, namely by the European Parliament. The newly proposed model would therefore allow the debt issued by Member States in recent years to be adjusted without forcing pro-cyclical policies. This is designed to meet the needs of the different Member States, while maintaining a global framework that minimises opportunities for free riding.

However, in the Communication, the Commission still fails to reflect upon the difficulties of achieving a fiscal position for the eurozone as a whole consistent with its position in the economic cycle. We can look at an example.

In November 2016, the European Commission put forward to Eurozone Member States a shared fiscal stimulus for the next fiscal year of 0.5% of GDP, with the aim of correcting the negative output gap in the Monetary Union and assisting the ECB in fulfilling its mandate on price stability. However, shortly afterwards, the Eurogroup clarified that the application of fiscal rules on Member States’ budgets prevented such a fiscal push from happening. The response from the Eurogroup was too strict, but the problems of overall consistency are real. In other words, rules designed to be applied in individual national economies do not necessarily generate an aggregate Eurozone fiscal policy that makes economic sense. This problem is present in the current rules and in any rules that fail to consider both the need to provide the Monetary Union with a balanced fiscal position and allow the cycle to be managed in a coordinated manner, while respecting the independence of the ECB.

The fact that there is no holistic reflection on the EU consolidated fiscal policy raises further incoherencies in our economic governance framework. The coexistence of fiscal rules on the one hand and the Macroeconomic Imbalances Procedure on the other offers additional inconsistencies. We can use another example.

In the period of 2013-2019, German public debt remained, on average, around 69.9% of GDP, and never fell below 60% until the end of 2019, just a few months before the start of the pandemic. Any fiscal recommendation from the Commission would have been to reduce this debt. However, in the same period, Germany recorded an annual average current account surplus of 7.6% of GDP, peaking at 8.1% in 2017. To correct this imbalance, the Commission would have recommended raising investment and consumption, including in the public sector. However, Germany could not have complied with the two contradictory recommendations, or at least the scope for doing so was considerably limited.

It should be noted that the Commission’s Communication directly acknowledges this inconsistency and, while failing to propose a complementary instrument to address it, at least raises the debate and commits to incorporating these externalities in its analysis. It is therefore striking that the text does not address – if only for the purpose of launching the debate – the issue of how to reconcile budgetary rules for Member States with the creation of an aggregate fiscal position for the Eurozone that is coherent.

The only way to adequately resolve both inconsistencies is if the Commission has its own fiscal instrument that, in a way complements the EU’s annual budget and those of the Member States, and reduces or strengthens internal demand depending on the needs of the Eurozone as a whole. This requires the NextGenerationEU fund to remain part of the Commission’s toolbox on a structural basis. This is not a question of providing the EU with a new vehicle for permanent transfers between Member States. That is what the cohesion policy and structural funds are for, and the strengthening of those tools can be discussed elsewhere. Nor does it mean issuing debt on a recurrent basis every year – something that is not advisable in the current crisis with such high levels of inflation. Instead, it’s a question of managing debt that has already been issued and being able to issue debt on a timely basis in the future if needed. Undoubtedly, the first step is to ensure the approval of the new own resources package. But we should not avoid the debate on this consolidated fiscal instrument, nor should we introduce it into the discussion as a peripheral issue to the reflection on fiscal rules for Member States.

Such an instrument would also reinforce the democratic legitimacy in the governance framework: the management of this tool would have to be overseen by the Council of the EU and the European Parliament. While indeed the European Parliament cannot participate in the approval of national budgets, it can – and must – take a position on the impact of each of the national plans on the European Union as a whole, framed by the EU’s ordinary budget and the need to use, or not, this central fiscal instrument. Let’s make it happen.

Jonás Fernández, MEP and spokesman for the Socialist Group in the Economic and Monetary Affairs Committee Public Agenda contributor