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25th Sep 2022

EU's mammoth fiscal rules debate back on menu

  • 'We have to acknowledge a new reality of higher debt levels,' EU Commission president Ursula von der Leyen said (Photo: EC - Audiovisual Service)
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Europe has announced its determination to spend its way out of yet another crisis.

Governments have already set aside €400bn in support this year to deal with the energy shortage — a consequence of Russia's "economic warfare," EU Commission president Ursula von der Leyen said in her state of the union address in Strasbourg on Wednesday (14 September).

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But replacing Russian fuels will take years, and extreme weather events and the need to rapidly transition to renewables will put a dent in the bloc's finances for years to come.

To deal with this, von der Leyen announced a drastic revision of the bloc's budgetary rules. "We have to acknowledge a new reality of higher debt levels," she said.

Although details of the plan are yet to be unveiled, new rules have to be more "flexible" and not bound to strict budgetary limits.

Before the pandemic, those EU budgetary rules prohibited deficits exceeding three percent of GDP, and limited the debt-to-GDP ratio to 60 percent, but this was suspended just before the pandemic hit.

Although the rule was broken many times, it symbolised and enforced a decade of austerity and low public spending which was supposed to limit the damage to public finances in the wake of the 2009 financial crisis — but instead deepened and prolonged the recession.

Implicitly distancing herself from this period, von der Leyen invoked the massive Covid-19 spending package launched two years ago as a "boost to our economic confidence," and a model for solving the current energy and climate crisis.

Member states will not be held to strict rules, but instead she sketched a system which would allow national capitals to submit a budget and investment plan which will then be approved and monitored by the commission — a modus operandi similar to how the €700bn Covid-19 relief funds have been allocated.

This will improve "ownership" by the member states, and "what has been agreed had to be done," she said, although the enforcement seemingly is not tied to hard budgetary limits.

While the commission takes the initiative, most of the political weight lies with the member states, who will debate the commission's proposal.

The often-dubbed 'frugal' countries — the Netherlands, the Nordic countries, the Baltics and Austria — have historically said they prefer a return to a system based on strict limits.

More-indebted countries generally want more flexibility. In the past, this difference in views has led to bitter disagreements between the two camps. The commission, meanwhile, will act as a sort of referee.

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