The European Commission will propose towards the end of the year how to simplify the European Union’s complex budget rules, cut accumulated debt and boost investment, European Economic Commissioner Paolo Gentiloni said on Thursday (4 March).
A revision of the rules, called the Stability and Growth Pact, started early last year, but the Commission suspended it because of the COVID-19 pandemic. It wants to re-launch the review once the post-pandemic recovery takes hold.
“We will re-launch the public consultation in the second half of this year and we will come up with a proposal later this year,” Gentiloni told the European Parliament.
A revision is necessary, because the rules, originally written in 1997 and revised three times since, have become very complex and focused on indicators that EU finance ministers often cannot control or directly observe.
Gentiloni said he would push for the revised rules to support public investment, noting that in the last euro zone crisis a decade ago public investment fell to almost zero.
“We cannot repeat this,” Gentiloni said.
European Commission Vice President Valdis Dombrovskis, also present, said one of the ideas in the discussions was to introduce a “golden rule” that governments can borrow for investment, but not for current expenditures.
To help the EU’s ambitious climate change and digitalisation goals, the new rules could even tie investment to spending public money mainly in these areas. “This is something that will have to be discussed,” Dombrovskis said.
Adieu to structural balance and output gap
The focus of the rules now is to keep public finances healthy – governments must strive towards a balanced budget in structural terms and not run a nominal budget deficit higher than 3% of GDP. If the gap is higher, the EU launches a disciplinary procedure which can end in fines, although so far it never has, despite blatant abuses of the limit.
“There is one parameter we would like to move away from in the context of simplification of the rules: structural balance and output gaps,” Dombrovskis said.
“These variables are difficult to observe and explain and also estimations of these variables are quite volatile,” he said. “So we are looking to move away from structural balances and more towards an expenditure benchmark and a debt anchor.”
Governments are now obliged to keep public debt below 60% of GDP and, if it is higher, cut it annually by 1/20 of the excess value or face disciplinary steps. Like with deficits, no country was ever punished for not observing that, even though some, like Italy, not only do not cut, but even raise debt every year.
The debt problem will become even more prominent now that the pandemic has boosted average debt in the euro zone to 100% of GDP, with Italy at 160% and Greece at 200%. Gentiloni said credible rules for debt cuts would be key in the revision.
But reaching agreement on what to do would be very tough because opinions differed strongly among EU governments, not least among the traditionally more frugal north and the anti-austerity south, which also tends to have higher public debt.
EU budget rules will be suspended for the third year in 2022 to allow governments leeway during the recovery, so a deal on the reform could emerge in time for their reinstating in 2023, or later.
[Edited by Frédéric Simon]