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28th Jan 2023

EU re-launches mammoth fiscal debates

  • European economy commissioner Paolo Gentiloni told press he expected the debates to start next year. (Photo: European Commission)
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The European Commission has reignited its effort to overhaul the way the EU governs its economy.

Commission president Ursula von der Leyen first launched the effort in 2019, but it was suspended due to the pandemic.

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The new rules should achieve at least two goals: reducing public debt throughout the union and allowing investment in green and digital technologies that amount up to €650bn annually, economy commissioner Paolo Gentiloni told press on Tuesday (19 October).

"We need economic governance rules that can tackle those challenges head-on," trade commissioner Valdis Dombrovskis added.

While the commission takes the initiative, most of the political weight lies with the member states, who will debate the rules next year - a process that is expected to last until the later part of 2022.

Particular attention will be paid to the 'Stability and Growth Pact' - a budgetary rule prohibiting countries from running a deficit upwards of three percent and limits the debt to GDP-ratio to 60 percent.

So-called frugal countries - The Netherlands, the Nordic countries, the Baltics and Austria - prefer a return to a similar rules-based system that caps debt and deficit to a specific ratio.

More indebted countries generally want more individual investment flexibility to "grow their way out of debt", as the Italian prime minister Mario Draghi described it recently.

In the past, this difference in views has led to bitter disagreements between the two camps, with breakthroughs only being forced through by the collective political weight of Germany and France, whose position in the upcoming debates remains unclear due to coalition talks and upcoming presidential elections, respectively.

The commission, meanwhile will act as a sort of referee.

Trust?

To guide the debates and foster "consensus" the commission ended the communique with 11 open questions and invited stakeholders to send in ideas before December 2021.

Questions featured were: "How can one simplify the framework?" and "how can the framework be improved to ensure sustainable public finances in all member states?".

"It is our role to provide orientation; we have an open mind," a commission representative told press.

But some critics felt the questions were too vague to make a difference.

"Ending communication with 11 super-open questions is a particularly skilful way of telling people that you have really no intention to meaningfully structure a debate. Which bears the question of why to publish something at all," Lucas Guttenberg of the Delors Centre, a think-tank based in Berlin, tweeted.

When pressed about its non-committal attitude, a representative reflected on the commission's strategy by saying that the goal to simplify the rules "is intrinsically linked" to the issue of trust, implying that simpler rules inherently create more flexibility - or room for interpretation.

"Why is it that rules have become so complex? That has a lot to do with trying to regulate all the unknowns - and that tells you something about the level of trust between member states," he said.

"If the previous crisis has thought us one thing, it is that things will always be different than we expect them to be," he added, expressing hope that "there may be less of a need to try to regulate everything to the last comma."

Meanwhile, Gentiloni said he expected the debates will revolve around the "pace of the debt reduction" and not the debt ratio compared to GDP.

Current EU rules prescribe that indebted economies reduce debt higher than 60 percent of GDP by 1/20th a year.

Italy has a debt to GDP ratio of 160 percent, which in practice means it has to reduce debt by an unattainable five percent a year.

"Debt reductions is an important goal," Gentiloni said, adding: "but we have to make sure they are compatible with reality."

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