Last March in a blog I pointed out that the inane fiscal rules of the EU "the Stability and Growth Pact" (SGP) (also called the Fiscal Rules) were to be relaxed. In fact, faced with reality of Covid19, the EU did more than relax these rules. It actually suspended them. Now, EU is going to re-write them. Yet some want to restore them in full, in spite of their failure.
Sides have to be taken now for a battle that will inform every budget in every state for years. The return of the SGP in full or even partially will boost poverty, inequality, damage the environment by slowing climate repair and reduce economic growth and development for decades.
A Complex Debate is Coming
The debate will be complex and it will not just be a right/left debate between fiscal conservatives and progressives. On the conservative side will even be a few social democrats. They are in countries with strong finances and are hostile to countries with weak finances, even where they are governed by conservatives. It is a debate between those who hold 1930 pre-Keynesian views and those with more realistic and progressive views.
The outcome of the success of the new Covid-imposed flexibility which forced relaxed fiscal rules has been demonstrated. The success of most government's huge spending response to the pandemic is the evidence needed to convince most reasonable people. One of Ireland's responses, the PUP, was the largest wage subsidy scheme in the history of the state. It has successfully helped bosses but cushioned workers too as recent data shows.
Paulo Gentiloni, EU Economic Commissioner, has said the EU needs to re-examine the role of public debt and how to better incentivise public investment. The Rules were brought in in 1992 under the Maastricht Treaty. When the new Single Currency was introduced in 1999, fiscal rules were required for member states, but not these ones. At the time they were much criticised by progressives as they enshrine austerity and are anti-Keynesianism, forbade public spending - even where it was counter-cyclical spending and even forbade capital investment in areas which generated good returns or in climate repair.
Reality Forced Change
In an earlier blog I had explained why there was a need for some rules but why these ones were inane. For three decades their iron rules were enforced by the commission against flexibility and progress. Social Democrats had said that the EU rules were insane when they were brought in, but conservatives ruled the EU as they still do. However, as we've seen in the past year unsuitability of the fiscal rules was exposed when Covid drove "a coach and four" through them and national debt, pegged below 60% GDP by them, is in is back with a vengeance. It now averages 100% of GDP in the Euro countries. The rules were unfit for purpose.
Bodies like the IMF, OECD, ECB, EU and EFB have been forced to move from hostile positions on public spending and debt to support big public spending programmes to deal with the pandemic. The European Fiscal Board (EFB) said that the EU's use of the temporary recovery fund was welcome but there was still a need for "permanent and genuine central fiscal capacity" that would help the EU handle future shocks. Its chairman Mr Thygesen said policymakers only had a year to embrace the change of the SGP before its likely reapplication. This would be a disaster for European people.
EU Admits Errors
The EU commission admitted that the complexity of the EU rules has "resulted in those rules becoming less transparent, hampering predictability, communication and political ownership" as it admitted it needs to focus more on countries with public finances in bad shape, according to a policy paper in February 2020. The EU was responding to deep public anger over the SGP especially during the Euro crisis and the paper admitted that there were problems with it and that it needs reform. Some northern states will oppose reform but the commission has flexibility in its approach to reform which it must execute - if the EU is to survive and grow.
Even the once reactionary IMF says "In many cases, borrowing to finance high-quality investment will be desirable, since cheap financing lowers the bar for whether to undertake an investment. In addition, the assets created generate taxable returns and are valued by markets when they price sovereign risk (October 2018 Fiscal Monitor)."
Progressives had argued that there should be "a golden rule" allowing capital investment for years. Now there is an argument by some that there should be at least extra scope for borrowing to fund just green investment. This is weak to me. Counter-cyclicality in current spending, high quality investment are now needed under future reformed SGP rules. Further there must be greater EU support for countries with weak finances.
After this pandemic, many countries will be in deep debt and even with low interest rates, will struggle to raise taxes to repay it. They will need EU support like "permanent and genuine central fiscal capacity" and forbearance, particularly during recessions.
Paul Sweeney @paulsweeneyman
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.