The frugal alliance stands to gain very little if their campaign for premature fiscal consolidation following the pandemic succeeds, but they risk exposing the entire EU to serious political and economic consequences, writes Anna Peychev.
Dr Anna Peychev is a researcher with Kent Law School at the Brussels School of International Studies.
Brussels is its charming usual self in the dead of summer – a damp calm with a storm brewing on the horizon of the upcoming political season. A decade after the sovereign debt crisis and a good year into the pandemic-induced economic crisis, government finances are again in dispute and old alliances from the eurozone’s painful recent past are being revived.
Italy, France, and Spain have made calls to reform the EU’s fiscal rulebook with a new approach to debt in response to current economic realities. Of course, such blasphemous designs find no favour with the frugal north, where the Austrians have busied themselves arranging a crusade to take on the ‘morally-alarming’ levels of debt and to fulfil a vision of an economic and monetary Eden with perfectly consolidated government finances and conservative monetary policy, where one shalt not run a budget deficit above 3% of GDP or debt burden above 60%.
Come 2023, these faithful purists would pick up EU fiscal rules exactly where and how they left them off before Covid hit and governments racked up unprecedented debt to keep their economies afloat. If they have their way, the righteous would nail their peers on the cross of austerity for the sake of fiscal piety, for it is said that dangers lurk with gluttonous spending lest another crisis hit or the markets exercise their mystical disciplinary potential.
This fervour is both excused and informed by fiscal conservatives’ experience with the eurozone crisis when they successfully championed their cause with the generous support and extraordinary might of the European Central Bank. Back in the 2010’s the Bank not only pontificated the virtues of fiscal prudence, but in fact led the inquisition against debt by enforcing austerity programmes as part of the notorious Troika and matter-of-fact legislating the overhaul of EU fiscal governance. It did so in the interest of conducting its monetary policy unperturbed with an approach premised on the global economic and monetary paradigm of the time – the same paradigm, which the EU fiscal rulebook is a direct function of.
But a decade, another crisis, and a monetary catharsis later nothing is as it was.
The fiscal arguments that won the day in the aftermath of the sovereign debt debacle and led to the most extensive overhaul of fiscal governance in the EU are all but hollowed out in the current monetary context. The ECB is now hell-bent on flooding the economy with cheap money, sporting a novel and healthy relationship with inflation, actively encouraging government spending, fully committed to securing low interest rates for the foreseeable future, and more interested in how you service your debt than the size of it.
These policies make it very difficult to sustain a narrative about the moral superiority of fiscal prudence. Nowadays, people’s savings are not only failing to deliver profit, but losing value in the long term and governments who refinance old debts on the cheap end up saving money in the process of incurring new sins.
To the knights of The Order of Three-Sixty this upside-down economic reality must make Christine Lagarde seem more the priestess of some pagan monetary cult than the papessa of the European Central Bank they have come to know and revere with the eurozone crisis. But make no mistake – the new strategically reviewed teachings are coming straight from the Sanctum Sanctorum in Frankfurt.
The point is that just as in medieval Europe religious crusades needed the sanction of the church, in monetary union Europe fiscal crusades need the sanction of the Bank. That is the simple logic behind the ‘monetary-led’ union, which spells bad news for the frugal three, four, or however many buy into the Austrian venture this autumn. Not unlike their southern counterparts a decade ago, they now find themselves of the heretical view. Their causa is perduta not because of the cunning of some political rivals, but because of the conflicting economic priorities and absolute prerogative of the European Central Bank.
Like true zealots, it is hard to fathom what Austria & friends are after in this latest crusade over fiscal rules – they stand to gain nothing, yet risk inflicting serious economic and political consequences onto the entire EU.
A premature turn to fiscal consolidation cannot force the hand of the Central Bank to adjust its monetary stance in the economic interest of the prudent north. If anything, pulling the plug on government spending when investment and growth are still badly needed risks leaving the ECB as the only game in town, burning the candle at both ends with its unconventional monetary toolbox.
Furthermore, wholesale implementation of the fiscal rulebook will likely kneecap the economic recovery and growth potential of NextGen EU funds. Such an outcome would severely widen the economic gap between members states, placing the future of the entire EU project in question. This would also invalidate the NextGen exercise and ensure that the fiscal-pooling experiment remains a one-off in EU history rather than a blueprint for future integration.
Be that as it may, there is nothing but sound reason to prevent governments from adopting a fiscal stance in direct conflict with their own monetary authority. Such policies would only serve to prove the argument made by ECB Executive Board member Fabio Panetta, that to chastise debt the way we did after the eurozone crisis is to have failed to learn anything from the mistakes of the past.
Fiscal prudence might well be a virtue, but its zealous pursuit in these economic and monetary times would be the difference between ten Hail Marys and a live sacrifice of the Union.