#Fiscal Matters is working for the transition towards a wellbeing economy that works for people and nature. A reform of the EU fiscal framework could potentially boost investments in climate action, nature protection, social and gender justice, and a just transition and transformation.

The European Commission relaunched the review into the EU’s controversial deficit rules today. The relaunch of the consultation process, which has been paused at the start of the pandemic, is long overdue. The constraints imposed by the current fiscal framework (ie. of the Stability and Growth Pact (SGP) prevent us from reaching environmental and social goals, and thus the transition towards a well-being economy.

What is the current EU fiscal framework all about?

The EU fiscal framework is a set of rules to constrain the fiscal policies of Member States to reduce economic crisis contagion risks. The main rules are 1.) the debt rule, meaning that debt of a country has to stay below 60% and 2.) deficit rules that state that the deficit has to remain below 3% of the GDP. These rules are enshrined in the Stability and Growth Pact which is a political agreement between the Member States. Failure to abide by these rules can be sanctioned with fines up to a maximum of 0,5% of GDP. Furthermore, the European Commission and the Council of Ministers issue annual recommendations on policy measures and surveillance to Member States to keep each one compliant with budget regulations.

What is wrong with the rules?

The rules have been critiqued on several grounds. For example, the rules on debt and deficit spending are totally arbitrary, based on outdated and flawed economic assumptions that have been disproved scientifically. Most importantly, the rules are totally blind to environmental and social concerns, potentially blocking rapid and effective climate action.

Environmental and social sustainability are interconnected with fiscal sustainability. The impacts of climate change, should we fail to sufficiently act, will incur a huge impact on long-term debt sustainability. This is closely linked to the fact that the rules are indifferent to the spending quality and do not look at how an investment might need to achieve certain environmental objectives. 

With over 10 different rules and regulations, the framework is also very complex and too inflexible to react to different contexts such as a crisis, where it can even end up putting more pressure on the Member States. A general escape clause, that temporarily puts the rules on ice, was introduced in 2011 to partly address this problem, but it does not address the fundamentally wrong direction that the SGP is pushing us towards. 

These issues make it abundantly clear that we urgently need a reform of the fiscal rules before the general escape clause expires in 2023.

New rules are urgently needed

We cannot repeat the mistakes made following the 2008-2009 economic recession and allow for governments to attempt to balance budgets through toxic austerity measures nor through massive unsustainable investments such as in fossil fuel-based infrastructure. Fiscal policy should be an enabler, not the chain that holds economies back.

An enhanced EU level budget alone will not be enough to meet these goals – national fiscal policy must be empowered too. Studies also show that fiscal consolidation and austerity, especially after the financial crisis of 2008, was a major driver of anti-EU sentiments and populism. 

Meaningful change of the fiscal framework requires collective action and the mobilisation of all citizens, NGOs and trade unions in each country and at the European level. The EEB is part of #fiscalmatters which brings together social, environmental, civil society and academics to discuss the future of Europe’s fiscal policy.

Widening the debate

Together with organizations such as Finance Watch, the European Youth Forum, Climate Action Network Europe, New Economics Foundation, European Trade Union Confederation, the EEB organised a week of debate with over 20 events bringing together different perspectives to raise awareness that fiscal does matter and to further widen the debate. 

The week kicked-off with an all-female panel, the first one of its kind, to touch upon the various problems with our current fiscal framework and potential ways forward. The speakers agreed that any reform of the EU economic governance framework needs to respond to the climate, environmental, social and health challenges ahead. The rules should be geared towards social and environmental goals by keeping in mind how to tackle the crisis now but also in the future.

To overcome political resistance and to free more fiscal space, one needs to ensure transparency. That means that processes need to be open and transparent, and that everything that is being decided on the EU and Member State levels needs to be explained to and understood by citizens.

We need more ambition and to start to radically change our economic system to make it more fair, sustainable and inclusive. As Sandrine Dixson-Declève put it: ‘’I want to begin by asking why we are using growth as the main system target for the economy, i.e. why are we  anchoring ourselves in old paradigms? We need to think about future generations and re-imagine how we address the environment”.

The big challenge is how to create a fiscal framework that is grounded in wellbeing and sustainability instead of growth and debt limits that will most likely drive Member States directly into a new wave of austerity measures. 

Together with Climate Action Network Europe the EEB also hosted a cross-party debate with MEPs from EPP, S&D, Renew, GUE/NGL and the Greens to discuss the different group perspectives. What became clear is that there is an overall agreement that the rules need to change, be more transparent and democratic and that sustainability aspects need to be taken into account much more strongly.

“For the new rules to function, they need to be designed in a more democratic way and they MUST be simple for citizens to understand them and be able to scrutinise. We need to move from a stability and growth pact to sustainable fiscal reform”, said MEP Margarida Marquess from S&D.

However, the devil lies in the details with different opinions on how much the rules should incentivize public investments, the role and the autonomy of MS in fiscal policies as well as the concept of exemptions and what kind of exemptions there should be. 

We also hosted an event in Dutch on the question of state debts to the European Central Bank (ECB) and the options to default on them. After all, these debts are really not the same as household debt. There was broad agreement among the professor, civil society representative and an insider (under the use of an alias) that this time, unlike the 2008 and 2011 crisis, EU member states should not fall in the austerity trap. A big chunk of what the ECB gave them should be either written off or turned into perpetual bonds at zero cost to the states. The debate was slightly more divided on whether or not this required a Treaty Change or the by now almost common use of heated Council meetings and backdoors to come to a more European approach to fiscal policy.

The EEB has been a long time advocate for changing the Stability and Growth Pact into a Sustainability and Wellbeing Pact, to anchor the change we need in the Treaties.

The myth of “green growth”

What has been largely absent from the debate is to question the current economic paradigm we are currently in. Reform discussion and debates were largely focused on the promise of continuous economic growth decoupled from environmental pressures. Within the EEB, we have been advocating for systemic change for years now. We know that so-called green growth is a myth, that it is simply not possible to continue growing without destroying the environment, despite claims by industry and institutions. Our economic system is based on the constant expansion of extraction, production and consumption that we measure as gross domestic product. 

Growth in itself is neither good nor bad but it is rather the focus of growthism for its own sake and for the sake of capital accumulation. Current macroeconomic policies, including the fiscal framework, in the EU and MS are designed to benefit the growth model based economy. Debates on the reforms, exemption of rules are a first step but fundamental changes of the EU fiscal framework that challenge the current economic system are needed. The upcoming review of the EU economic governance framework will be a key moment to radically reform the rules to a fiscal framework that puts wellbeing at its core and which is fit for a post-growth future. 

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