A few weeks before almost the entire continent came to a halt due to the Coronavirus crisis, the European Commission launched a Consultation on reforming the EU’s economic governance. However, the crisis meant that the debate concerning this necessary reform came to a standstill, which is not a great surprise: at the beginning of April, the key provisions of the EU fiscal rules, namely the restriction of national budget deficits to 3 % and debts to 60 %, were suspended for the period of the crisis.

Hence, it will be all the more important to prevent a return to the old rigid rules once the crisis is over and to avoid a repetition of the mistakes made after the 2008 financial crisis. After all, it was the austerity policy, which, particularly in Southern Europe lead to massive cuts in public spending – a price, which these countries, for example due to austerity measures in the healthcare system, now have to pay.

The European Union Treaties include general key objectives to guarantee an economic policy, which ensures the “economic convergence” and the “economic and social progress of their peoples, taking into account the principle of sustainable development”. However, instead of orientating EU Economic policy towards this target, it predominantly spent the last decades on avoiding excessive budget deficits. This gave the impression that the original targets would be automatically achieved, in spite of a decentralised economic policy, if only public budgets would prescribe a medium-term objective of budgetary positions close to balance. That this is not the case was made clear by the dynamics of the 2008 economic crisis. The latest economic crisis, caused by the Coronavirus, must not repeat this mistake.

As the Chamber of Labour states in its contribution to the consultation, budget policy will continue to play a key role. However, it must no longer be reduced to avoiding “excessive” deficits but has to serve as an important instrument of a balanced and prosperity-oriented economic policy. Rules, which give priority to maintaining a certain deficit value, are counter productive and should be replaced by a guide value for structural revenue and expenditure development. For example, a Golden Investment Rule, which would ensure that public investments are not used for calculating new debt, would be important. Debt reduction must not be at the expense of key targets such as climate protection or full employment. On the contrary, extensive public investments will have to be made over the coming years to ensure the Green Deal, which the EU itself defined as a priority target, and climate neutrality by 2050.

This necessary realignment requires a treaty reform. At the same time, an amendment of the EU Treaties should also be used to increase the co-decision competence of the EU Parliament in order to make processes more democratic and transparent. Establishing a Eurozone Parliament would also be conceivable to integrate it in the regulations of the Eurogroup. Instead of setting a certain policy in concrete, EU Treaties should provide rules, which enable a democratic debate for the best and up to date solution.

Apart from that, more funds are required at European level, which contribute to effective fiscal and economic governance respectively. The Recovery and Resilience Facility, which has been created within the scope of the recovery fund, has been a positive step. It enables Member States for the first time to receive finds in form of loans. According to this, the positive immediate action, which was taken within the scope of the Coronavirus crisis, have to result in a progressive reform of the Stability and Growth Pact to at last fulfil the key objectives of the European Treaties.

Further information:

AK EUROPA Position Paper: Economic Governance Review

AK EUROPA Policy Brief: Economic Governance - Focus on Sustainable Development of Well-Being

AK EUROPA: Stability and Growth Pact: Commission launches reform debate

AK EUROPA: EU sets out fiscal rules for the Member States due to the Corona crisis

A&W Blog: A progressive reform of EU budget rules?