The much-needed reform of the EU’s fiscal rules is well under way. There is broad agreement that the EU’s economic governance framework and the rules of the Stability and Growth Pact are outdated. But there is a lot of disagreement about how to reform the fiscal rules to make Europe fit for the challenges of the 21st century. There is only one way to ensure Europe’s leading role in a competitive global economy undergoing the twin green and digital transformation: Investment with social strings attached! The new rules must encourage investment and not repeat the old mistakes of austerity.
Indeed, the proposals do correct some of the past mistakes, with the biggest improvement being the move away from a one-size-fits all approach. 

The new rules propose country-specific plans, with a slower and more realistic pace for a Member State to get its public finances in order (the 1/20 rule for debt/GDP consolidation and the structural deficit criteria are thankfully gone). The possibility of resorting to country-specific escape clauses is also very welcome. More clarification is needed on how they work, but we understand that they would temporarily suspend the rules for a Member State in difficulty, as the general escape clause did for the EU during the COVID-19 pandemic.

Push to invest is missing

These positive aspects of the reform are steps in the right direction. But we are missing the much-needed push for investment, especially green investments with social conditions. According to the European Commission’s own impact assessments, reaching the 40% target by 2030 would require an average of EUR 336 billion of additional investment per year (2.3% of GDP). The 55% compatible scenarios require on average EUR 438 billion of additional investment per year (2.7-3% of GDP). For the energy sector, this would imply EUR 7.7 billion of additional annual investment in the power grid by 2030 and EUR 14.4 billion in power plants. For industrial sectors, the additional annual investment would be about EUR 3.4 billion. But, under the new rules, such massive investment seems impossible.

Unfortunately, the new rules give no indication that the Commission is ready to adopt a new logic that would see the correction of macroeconomic imbalances through investment rather than austerity. Failing to invest in the green transition and quality green jobs will have far worse consequences for the sustainability of public finances, than not doing so. Investment is not expenditure to be cut, and the new rules do not seem to make this distinction. How can Member States achieve their climate goals through a just transition for workers if green investment is treated as expenditure to be cut under the new fiscal rules cut?

Austerity’s damaging impacts

Failing to recognise that investment is key to the sustainability of public finances means failing to learn from the positive lessons of the EU’s response to the COVID-19 crisis and repeating old mistakes of the post-2008/09 financial crisis. The massive support for industry, economy and people, based on mutual solidarity, allowed Europe to rapidly recover from the COVID-19 crisis. On the contrary, the harsh austerity imposed after the financial crisis pushed Europe into recession, followed by a slow, wage-lagging recovery. Remarkably, the United States seems to have learned from the past, as it is now embarking on a forward-looking approach based on investment with social conditionalities. 

Unfortunately, Europe still seems to be stuck in an outdated (neoliberal) logic. We hear the sirens of austerity once again when we read the conclusions of the EU Council and the Commission’s communication on the reform of the EU’s fiscal rules. Despite strong criticism of the economically unfounded reference values of the EU treaties, the reform will not change the infamous 3% and 60% rules (public deficit of 3% of GDP and debt of 60% of GDP). Today, 14 Member States exceed the 3% limit and risk a rigid break put on their investment capacity, as it is unclear whether investment will be treated as expenditure or not. As the reform is accompanied by stricter enforcement rules, there is a risk of rigid breaks being imposed on Member States that may already be struggling to keep up. Thus, instead of promoting upward convergence between Member States, the new rules risk widening the already wide gap between Member States and jeopardising the twin transition. 

The new rules shortcomings

Who gets to decide? The European Commission and the Council will negotiate plans with national governments, without any democratic process through the European and national parliaments. These plans will set out the trajectory for countries to get their public finances in order over four or seven years, depending on how risky the country’s debt sustainability is deemed to be. In addition to the democratic deficit of the process, there are other major problems. First, those countries deemed ‘high risk’ will have less time than those considered ‘low risk’. Second, the plans have strict spending ceilings that limit a country’s ability to invest and thus improve its situation. Third, the plans are based on the Commission’s risk assessment, which is based on future assumptions. Europe’s self-inflicted post-2012 recession has shown us that the neoliberal technocrat’s assumptions about the future were wrong. Yet the plan is to trust them again with putting our public finances in order. 

There is too much at stake for our leaders to repeat past mistakes of austerity. 15 years ago, the far-right was a fringe phenomenon in most EU countries. After the harsh austerity measures imposed a decade ago, we have seen them slowly creep into national and European parliaments, and now they are even winning elections. Another round of austerity will only fuel the deeply worrying rise of far-right parties. At a time of growing public distrust in governments and public institutions, Europe needs to invest in people, in good quality jobs in green and digital industries, in the economy and in society, to restore confidence in the progressive path. The clock is ticking as the 2024 European elections approach.

This opinion piece was published in Euractiv