Revamping fiscal rules requires a new understanding on debt sustainability

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Reforming the European Union’s flawed macroeconomic architecture as the post-pandemic world demands a new fiscal rulebook to boost our economies, argues Margarida Marques. [Gideon Benari / Flickr]

It is necessary to reform the European Union’s flawed macroeconomic architecture as the post-pandemic world demands a new fiscal rulebook to boost our economies, argues Margarida Marques.

Margarida Marques is a Portuguese MEP of the Socialists and Democrats Group and author of a parliamentary report on the EU macroeconomic legislative framework

While US President Joe Biden brought out a financial bazooka to counteract the pandemic-induced economic downturn, the European recovery risks being shackled by its outdated fiscal rules. For most of the past decade, Europe has been trapped in low growth, with low investment rates and net public investment close to zero.

Luckily, Europe has – at least until now – not committed the same mistake as it did in the wake of the global financial crisis:  passing the buck to the ECB and focussing too quickly on withdrawing support and reducing debt. This time it’s different.

The European Union’s policy response to the COVID-19 pandemic is a game-changer.

With 750 billion euros for the Next Generation EU recovery instrument, the 100 billion euro SURE unemployment protection tool and more than 500 billion euros in national measures facilitated by the flexibility of the EU budgetary rules, the EU is undertaking an epochal effort to alleviate the social impact of the COVID-19 crisis and master the digital and green transitions.

Europe is steering a good course – as long as EU governments don’t use the debt brake and halt the recovery.

Budget hawks are already calling for the return of the current rulebook on the EU fiscal rules. A hasty and reckless return to the EU’s stringent budget rules would jeopardize the historic recovery effort undertaken to prevent the collapse of companies, families, and the economy at large.

While the pandemic is still destroying lives and livelihoods, it is no time for counting pennies. It is time for serious firepower and the courage to undertake big reforms and investments, and to address the inequalities of the crisis. It is time to ensure that country-specific challenges are taken into account.

The flaws of the EU’s current fiscal architecture were evident already before the pandemic. But its defects and deficiencies have become even more clearly exposed by the demands of this crisis and the post-pandemic world we are about to enter. Debt and deficit rules have become objectives instead of instruments.

Rather than having the perfect fiscal framework in theory, our aim should be to do fiscal policy right in practice.

While Mario Draghi’s ‘whatever it takes’ policy saved the euro, it has also become undeniable that macro-stabilization cannot be left to monetary policy alone. Fiscal policy must step up its role. Our current rules don’t foresee this because they stem from a different time.

Today, a new consensus is emerging on how monetary and fiscal policies should address tail events. Such an effective and coordinated response would have been unthinkable years ago.

Of course, monetary-fiscal coordination has its limits and there will be a need to rebuild policy space. We need to anchor both the monetary and fiscal policies to their long-term goals, backed by a resilient institutional framework.

Underpinning this new framework must be a new understanding of debt sustainability.

Europe needs to move towards a comprehensive and transparent assessment of debt sustainability that integrates in its dynamics the notion of debt service costs, recognises that environmental and social sustainability are interconnected with long-term fiscal sustainability, and allows for differentiated debt-reduction paths while taking into account member states’ differences.

Instead of a debt brake, which only too often has turned out to be a brake on economic recovery and growth, we should focus the fiscal targets on the achievement of a credible debt anchor, allowing different paths to debt reduction.

In this year’s Spring Economic Forecast, the Commission confirmed the extension of the general escape clause until the end of 2022. This gives us time to rethink and reform the EU’s economic governance framework towards a model of fiscal policy that not only looks at debt sustainability but also supports inclusive and sustainable growth.

With next week’s vote, the European Parliament will kick-off the political discussion with its contribution to the public debate the Commission is set to relaunch after the summer.


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