During the EU Summit on March 23-24, Heads of State will discuss the future of the Stability and Growth Pact and wider economic governance in the EU. As the general escape clause, suspending the arbitrary deficit and debt rules will be deactivated in 2024, securing a green and just transition requires a major revision of rules that guide our economies.
Andreas Budiman and Eleonora Volpe report.
More than half of Member States are unable to abide by the current 3% and 60% debt and deficit rules. Nonetheless, these outdated thresholds could remain the cornerstones of the fiscal policy at a time when urgent action is needed toward sustainability. The recent orientation paper on updating EU economic governance includes several important proposals, such as country-specific debt reduction pathways and eliminating the 1/20th rule. However, those proposals do little to alter the flawed rules that guide our economies.
As the EU grapples with multiple crises, it needs a stronger foundation to rebuild its economy with real care for society and nature. The European economic governance review is a unique opportunity for change. Implementing seven key reforms presented by the Fiscal Matters coalition could provide the basis for aligning EU economic governance with the urgency of the green and just transition.
Growing resilience, respecting limits
EU economic governance should get past the growth-centric paradigm and instead focus on resilience. This would mark a major shift from quantity to quality, from the meaningless pursuit for more to measurable indicators that make sense.
Multiple studies have debunked the ‘green growth’ myth and its capacity to help us stay within planetary boundaries. The Commission’s proposal of introducing slower debt-reduction pathways is a good start, giving countries greater fiscal flexibility. However, it will only make sense if we ensure that all future investments contribute to long-term social and environmental wellbeing and resilience.
The ‘Do No Significant Harm’ principle (DNSH) should become a baseline for all reforms and investments, and should be ingrained in national fiscal plans.
Investing in the future
For future generations to live well, we must invest in their future now. Closing current social and green funding gaps is an essential step in this direction. It would prevent the need to spend more time dealing with the outcomes of the disrupted climate and mitigate the likely and unfair increase in debt caused by the delay in spending.
Member States should be able to exclude future-oriented spending within the national medium-term fiscal-structural plans from the current debt and expenditure limits. For example, investments in nature-positive renewables, future-fit jobs, and healthcare bring immense benefits while bearing minimum risks. Prior technical assessments and political validation by the Council could help mitigate greenwashing attempts to circumvent the rules.
Progressing debt sustainability
Debt Sustainability Analysis (DSA) is often used to identify public debt vulnerabilities and possible corrective measures. DSA design choices are not neutral, but aligned with the EU social and environmental objectives, the tool could help us leave arbitrary fiscal thresholds, such as the debt-to-GDP ratio, in the past.
The methodology should be participatory by design, integrate climate risks and slow onset processes that current rules disregard, and reflect the fiscal multiplier effects of public investments. We need the DSA to reflect the reality of social preferences and ecological processes.
Reforming the EU Semester
Country-specific recommendations should better account for EU environmental and social objectives and make progress measurable, with streamlined monitoring of crucial agendas such as the European Pillar of Social Rights. The European Semester should be separated from the Stability and Growth Pact and have its dedicated regulation to make it more flexible and independent in considering real social needs.
At the same time, we must embrace the mutual dependencies of economic, energy and climate governance, helping to prevent cases like subsidising fossil fuels while failing to finance urgent social and environmental priorities. Adopting a Social Imbalances Procedure within the European Semester would help identify and address any asymmetries between social and economic spheres early on.
Accounting for real risks
Global economic losses from climate change could amount to up to $65 trillion, while around 80% of all economic losses between 1980 and 2020 across the EU have been climate-related. Member States failing to meet their environmental goals generate vast macro-economic risks with potentially irreversible outcomes, such as the destruction of assets or loss of entire ecosystems providing the basis for any economic activity and additional expenses on recovery from extreme events.
As those losses are likely to scale up fast, climate risks have been only marginally considered in the recent EC orientation paper. We need a much stronger stance on climate risks, including making them an integral part of the Macroeconomic Imbalance Procedure.
Making diverse opinions count
Increased involvement of national Parliaments and other stakeholders (civil society organisations, social partners, advisory bodies on gender equality, etc.) in developing and monitoring national medium-term fiscal plans would make them more transparent, inclusive and better monitored.
New rules can be strengthened with the active participation of various finance ministries, independent fiscal institutions, the European Fiscal Board, academic experts, and civil society.
As more stakeholders genuinely engage in economic policymaking and influence why and how funding is allocated to specific priorities, this would facilitate greater engagement and productive discussions around the kind of economy we are building.
Creating fiscal capacity for inclusive transition
The unfolding multicrisis transcends national boundaries and requires joint action. A permanent EU fiscal capacity could facilitate such action, assisting countries at risk of failing to meet shared goals and targets while safeguarding against delays in action. Finance for the green and just transition should finally span beyond a limited selection of jobs, regions and sectors and facilitate real economy-wide transformation.
Making space for change
Investment decisions made today take decades to implement, while climate disruptions caused by today’s inaction can take decades to materialise. Today, we need a reform to address both of those issues at once. We need rules that remove barriers to action and help accelerate the transition.
The seven reforms outlined by the Fiscal Matters coalition are a necessary step beyond the simplistic interpretations of stability and control. They provide an essential foundation for evidence-based and future-proof economic governance. Implementing those reforms today could become a crucial milestone in safeguarding our shared future.
The Fiscal Matters coalition brings together civil society organisations, think tanks and trade union leaders to support a democratic and transformative reform of the EU fiscal rules. Read its new joint policy brief “Investing in our future: seven EU economic governance reforms for a stronger, greener and more resilient Europe”.
