The traffic light must support the reform of the EU fiscal rules

Created: 12/19/2021, 09:18 AM

Prof. Achim Truger is a member of the Advisory Council for the Assessment of Macroeconomic Development and Professor for State Activities and State Finances at the University of Duisburg-Essen © N. Bruckmann / M.

Litzka / SVR

Calls for a relaxation of the EU stability criteria are getting louder.

Without an adjustment, countries such as Italy or France could be obliged to take sensitive austerity measures and thus jeopardize the hoped-for economic upturn, writes the economist Prof. Achim Truger in the guest article.

The EU reacted very differently to the severe corona economic crisis than it did to the global economic and financial crisis in 2009.

At that time, the euro area sank into a catastrophic economic, social and political crisis for half a decade.

This time, economic policy in the EU braced itself resolutely against the crisis from the start.

The ECB quickly provided liquidity and stabilized the government bond markets.

The EU suspended the Stability and Growth Pact, i.e. the debt rules, until 2023 so that the member states could support companies and employees.

Finally, after some political wrangling, an agreement was reached on the nearly 700 billion euros strong European development plan, which is now supposed to support the upswing.

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This applies to current news, but also to very basic questions: How do the billions of Corona * aid * and the debt brake fit together?

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EU fiscal rain: the debt criterion threatens disaster

First of all, the EU has done a lot, very well and rightly. Nevertheless, great dangers threaten if the fiscal regulations of the Stability and Growth Pact should be reinstated unchanged after the crisis. Above all, the debt criterion threatens disaster: Countries whose debt level exceeds 60 percent of gross domestic product must move fast enough to the limit of 60 percent.

This could hit countries that are already hard hit by the euro and corona crisis, such as Italy, Spain and Portugal, but also France, with debt levels well above 100 percent.

You could be forced to adopt a highly restrictive fiscal policy with severe spending cuts and tax increases.

That would in turn destroy the positive effects of the European reconstruction plan and jeopardize the economic upturn.

EU needs reform of fiscal rules

To prevent this, a reform of the EU fiscal rules is needed, which gives the member states more leeway, especially when it comes to reducing the debt ratio. For example, one could raise the limit value for the debt ratio from 60 percent to 90 or 100 percent for all states. Alternatively, states with particularly high debt ratios could individually be granted longer adjustment periods or temporarily less ambitious target debt ratios. In addition, the states need more leeway to finance important public investments in the future, above all to combat climate change *.

It is precisely these reform proposals that are now dominating the European and international debate.

Institutions that would not necessarily have been expected to do so in the past are advocating this, including the European Parliament, the European Economic and Social Committee, the European Fiscal Committee, the European Stability Mechanism, the European Central Bank and the International Monetary Fund - from one Not to mention the long list of economists and economic research institutes and think tanks.

Tremendous consolidation efforts

But isn't it then rewarding the states with high debt levels for having lived beyond their means in the past and for not complying with the rules?

Nothing could be more wrong: between 2010 and 2015, the crisis states in southern Europe in particular undertook tremendous consolidation efforts amounting to at least five to ten percent of economic output in an attempt to adhere to the rules.

Transferred to Germany, this would have corresponded to 50 to 100 percent of the federal budget or all state budgets - it is difficult to imagine how anything similar should have been politically enforced in Germany.

The fact that the unimaginable consolidation efforts in the crisis countries did not pay off was due to the fact that they aggravated the economic crisis and kept the countries trapped in a severe recession.

This in turn prevented public finances from recovering and even led to an increase in debt levels relative to economic output, simply because economic output fell.

It was only when the interpretation of the fiscal rules was relaxed in 2015 that the economy recovered and the rise in debt ratios was slowed.

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EU fiscal rules: Brussels must take the next step

With the expansive reaction to the Corona crisis, the EU has therefore also learned the lessons from the serious economic policy mistakes in the euro crisis.

Now it still has to take the next step and reform the EU fiscal rules accordingly, as demanded by a large majority of institutions and advisors.

The EU should therefore use the resumed review of economic governance as an opportunity to reform the fiscal rules.

The new German federal government * is of particular importance here.

It must use its traditional role as a mediator between the southern European states and France on the one hand and some so-called frugal central and northern European states on the other to drive the reform forward.

EU Fiscal Compact: Even the Netherlands is embarking on a reform course

It is optimistic that the new government in the Netherlands, which has traditionally been one of the biggest brakes on reform in financial policy in the EU, is now in favor of modernizing the Stability and Growth Pact.

In the coalition agreement, the new federal government has also spoken out in favor of further developing the EU fiscal rules.

It must now act accordingly.

The crisis countries could hardly survive another wave of cuts economically, socially and politically - so it is about nothing less than the continued existence of the euro and thus the EU.

About the person: Prof. Achim Truger is a member of the Advisory Council for the Assessment of Macroeconomic Development and Professor for State Activities and State Finances at the University of Duisburg-Essen.

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