On 9 November 2022, the EU Commission presented its ideas for a reform of the EU’s economic governance framework. This was preceded by a long-term debate on sense and nonsense of the European fiscal rules with evaluations and consultation processes, in which AK also took part. If it seemed that until early 2020 a comprehensive reform would not least fail because of the rigid position of the Austrian government, the Covid-19 crisis added a new dynamic: adhering to existing rules was no longer conceivable, their suspension the logical consequence. In order to manage the unprecedented crisis and to implement the Green Deal, the Recovery and Resilience Facility, RRF, which represented a turning point in European economic policy, followed in 2021: subsidies worth billions for mid-term reform  and investment plans, financed by Eurobonds. Even before the now presented Communication it had been clear that the EU Commission wants to build on – the frequently positively perceived – experience and consolidate this turning point.

At the centre of the EU Commission’s reform proposals are the now mid-term-oriented reform and investment plans, the main difference being that subsidies are no longer provided for. Instead of feeding a carrot, not using a stick shall be an incentive for Member States to implement the plans: if their plans are ambitious, countries shall be given more scope in respect of complying with fiscal rules. However, as The Vienna Institute for International Economic Studies has analysed in a recently published Study, this should not be sufficient to make in particular those public investments needed to achieve climate targets. Hence, they are in favour of setting up a permanent EU Climate Energy Investment Fund with subsidies of at least 1 % of the EU economic output to finance public investments. This may be a functionally adequate alternative to the golden investment rule, which is still a controversial issue between Member States.

According to the ideas of the EU Commission, the two main current rules – the limit for the deficit of 3 % of GDP and the long-term compliance with the national debt limit of 60 % of GDP – will remain unchanged. Still, the additional rule stipulating the compliance with 60 % within 20 years, which was only introduced a decade ago, shall be scrapped again – also because of the lack of feasibility in view of an average gross national debt level of recently 94 % of GDP in the euro area (and even 171 % in Greece). It will be replaced by a country-specific analysis of the EU Commission whether the fiscal policy may be sustainable, graduated according to national debt level: countries such as Ireland that fall below the 60 % limit, have almost a free hand regarding their budget policy. Countries such as Austria that are not too far above the limit, must curb their public spending – adjusted by economic impact, tax changes, EU-funded investments and interest –, however, in case of ambitious reforms and investments they are given more time to reduce their debt. And finally, countries such as Italy that have to curb their public spending more severely and faster. The compliance with these plans shall continue to be reviewed on an annual basis, imposing sanctions, which should make a faster impact – but would be less draconian.

The Finance Ministers of Germany and France have already accepted the proposals of the EU Commission as the basis for the negotiations. A major point of discussion will certainly be the new power of the EU Commission that would have a far-reaching scope regarding its definition, which budget routes are deemed to be acceptable and which not. Hence, a preliminary assessment of the Commission proposal is difficult because it depends on which EU Commission will monitor the compliance: if it plays a role like it did before in respect of the Troika negotiations in Greece, the reform will result in political tensions and loss of wealth. If it remains true to its current prudent line, which is focussed on implementing the European Green Deal, implementing its reform proposals will bring major politico-economic improvements. Much depends on the details, which have yet to be provided by the EU Commission.

However, from a broader perspective beyond the fiscal rules one has to criticise even now that the reform will fall short: instead of placing the sustainable development of welfare and wellbeing systematically at the centre of policy coordination, the focus remains on budget targets – and with that the implicit ideological bias that the economy would function all the better, the more the state will be pushed back. Hence, in doing so major questions remain omitted: How can Euro-Member States counteract in an economic crisis? How can they jointly gear their budget policy towards the highest possible and convergent degree of welfare and wellbeing? How can citizens decide on the political orientation, when the European Parliament – as their elected representation – has been left out?

As one of many targets, avoiding excessive deficits definitely makes sense. However, it should not be regarded as an absolute priority detached from current economic, social and environmental challenges, which usually require an increase in public expenditure. The additional reform and investment plans are not adequate – nevertheless, they would certainly be an improvement over the status quo.

Further information:

AK EUROPA Position Paper: Economic Governance Review

AK EUROPA: Europa needs a reform of the Stability and Growth Pact!

Vienna Institute for International Economic Studies: RRF 2.0 – A permanent EU investment fund in the context of energy crisis, climate change and EU fiscal rules (German only)

European Commission: Economic governance review