The European Fiscal Board on Tuesday (1 July) recommended to get rid of the EU’s debt threshold of 60% of GDP and instead adopt realistic debt targets specific to the bloc’s national economies.
“It doesn’t serve any purpose to have a target that is unrealistic,” the chair of the European Fiscal Board, Niels Thygesen, told a group of journalists during a videoconference. “We need to look critically at that”.
The European Fiscal Board is an independent advisory body of the European Commission.
The impact of the coronavirus will push public debt levels in Europe well above the 60% of GDP limit included in the Stability and Growth Pact, the EU’s fiscal rulebook.
The EU’s debt is expected to reach 102% of GDP this year, with countries such as Greece, Italy, Portugal, France and Spain above 115%.
Bringing down debt levels to the agreed threshold would require efforts that are unprecedented in the world economy, Thygesen said. “It will require too much”.
For that reason, he said the European Fiscal Board are working on a proposal to assign specific debt targets to member states according to the circumstances of the national economies.
Their proposal could be included in the board’s annual report to the European Commission, due in October. The Commission is the guardian of the EU treaties, including the bloc’s fiscal rules.
Earlier this year, the EU executive launched a process to review the Stability and Growth Pact.
Debt sustainability remains a priority for the EU’s fiscal watchdog. Debt reduction plans in high indebted economies are important “signals” for investors, even if market pressure is currently lower than during the euro crisis thanks to the ECB intervention, it said.
Thygesen presented on Tuesday an assessment of the general orientation of the fiscal policy for the euro area.
The board warned that the net levels of investment, net additions to public assets, are near zero, and never recovered from the 2010 crisis, even before the coronavirus pandemic hit.
For that reason, the body called for more public investment in member states, saying the EU’s proposed €1.85 trillion budget for 2021-2027, which includes a €750 billion recovery fund, will not be enough to lift Europe’s growth potential.
Thygesen said national policies have to be more favourable to investment. “It requires incentives and outright determination by governments”.
The board also warned that it is too early to reactivate the deficit and debt limits in the EU, following the suspension of the Stability and Growth Pact in March.
But Thygesen said that the Commission should clarify, by spring next year at the latest, the timing and the conditions to reactivate the EU’s fiscal rules.
The EU executive is planning to review in the autumn when and how to reintroduce the bloc’s expenditure limits. The Commission vice-president for the economy, Valdis Dombrovskis, recalled on Tuesday that the Stability Pact will remain on hold as long as the economy suffers a severe downturn but will be reinstated afterwards.
To guide the Commission’s decision, the Fiscal Board recommended not only to look at the EU’s economic growth figure for next year, which could reach 6%, but also to look at the bloc’s GDP compared with pre-crisis levels. Otherwise, the Commission risks recommending austerity measures in the midst of the recovery, it warned.
According to the board, economic growth next year will be around 4% below the pre-pandemic outlook.
(Edited by Frédéric Simon)