EU fiscal governance must be revised to assist a sustainable recovery and just transition

The hearing organised by the European Economic and Social Committee (EESC) highlighted the need for a reform of the EU budgetary rules applicable in the Member States in order to ensure a sustainable post-COVID-19 recovery and to secure the public investments required for the green and digital transition.

Reshaping the EU's fiscal rules is indispensable to pave the way for a sustainable recovery and to strengthen public investments to make the EU fit for the green and digital transition. This is the key idea behind the hearing, which was hosted in Brussels and online by the Section for Economic and Monetary Union and Economic and Social Cohesion (ECO) on 10 September 2021, in connection with the current EESC opinion on Reshaping the EU Fiscal Framework for a Sustainable Recovery and a Just Transition.

The revision of the economic governance rules had already started before the COVID-19 pandemic but was put on hold due to the worsening crisis and the triggering of the general escape clause contained in the Stability and Growth Pact. It was therefore important to resume this revision as soon as possible, said Stefano Palmieri, president of the ECO section. However, instead of a "return to normal", the EU needs a "shift" towards a revised, rebalanced and prosperity-oriented economic governance framework, which gives equal weight to a range of key policy objectives, such as sustainable and inclusive growth, full employment and decent work, a competitive social market economy and stable public finances.

Mr Palmieri's words were echoed by Luca Jahier, president of the study group for the EESC opinion, who pointed out that it was time to work towards a revision of the European fiscal rules that was more balanced and more supportive of sustainable growth. First the pandemic, and now the implementation of the Recovery and Resilience Facility (RRF) have radically changed the scenario, compared to previous years: we need a different approach, for the medium-term stabilisation of our economies, for financing their green and digital transition and for flexible and country-specific debt adjustment paths.

Possible reforms without Treaty change

Experts from organised civil society and academia, as well as decision-makers, discussed how the new economic governance framework should be shaped to ensure that fiscal policies target both long-term sustainability and short-term stabilisation.

Sebastian Dullien, representing the Macroeconomic Policy Institute (IMK), set the scene from an economic point of view, outlining the main construction sites of the current fiscal framework: fiscal rules are not investment-friendly enough, tend to be pro-cyclical, could impose excessive austerity in the coming years and are excessively complex. In addition, Mr Dullien presented practical reform proposals that included a golden rule for public investment, an expenditure rule for non-cyclical budget categories and an increase in the debt anchor.

René Repasi from Erasmus University, Rotterdam, complemented these reform proposals with a legal analysis, pointing out that they could be carried out under the current Treaties and that there was room for manoeuvre for reforms, provided that the main objective of avoiding excessive deficits was met.

Mr Dullien and Mr Repasi, together with other colleagues, have been working on an interdisciplinary study commissioned by the EESC, focusing on both the economic need for possible reforms and their legal viability. The study will be published in October.

Referring to the public consultation for the economic governance review launched in February 2020, Marco Buti, Head of Cabinet of the European Commissioner for Economy, Paolo Gentiloni, stated that the Commission was ready to restart it, after having had to put it on hold because of the pandemic. The review had taken stock of the lessons learned during the global financial and sovereign debt crisis and one thing was crystal clear: after the pandemic, fiscal rules were no longer seen only as a way to control public debt, but also as a way of carrying out public investments, which were at the core of our society's future.

For his part, Thierry Philipponnat, on behalf of Finance Watch, maintained that there could be no debt sustainability without social and environmental sustainability, and suggested turning budgetary discipline into a tool for development, investing for a sustainable future.

Marcello Messori, from LUISS University, pointed out that the EU's sustainable development in the post-pandemic phase was incompatible with pre-pandemic fiscal mechanical enforcement and that it was therefore important to tap into the potential of the previously rejected 2013 European Council "contractual arrangements" to simplify and modify the old fiscal rules.

In a video message, Alicia Hinarejos, representing McGill University, agreed that the Treaties left some leeway and that expenditure rules could be amended just by changing secondary legislation, with no need for Treaty reform.

Towards a more democratic and effective EU fiscal governance

Against this background, one of the issues is how to strengthen the role of parliaments, making the EU's fiscal rules more democratic and increasing their ownership by the EU's citizens, establishing a clear dialogue with civil society organisations.

Philip Gerson, from the International Monetary Fund (IMF), emphasised the fact that the EU fiscal framework presented substantial scope for improvement, as it suffered from the risk of inconsistency and overlap between its different parts.

On the same wavelength was James Watson, representing BusinessEurope, who agreed that the rules had become too complex and called for their simplification and for better communication, which would also make it easier to enforce them. Rules had to be credible and enforceable.

Lukas Oberndorfer, on behalf of the Austrian Federal Chamber of Labour (AK), said that the future fiscal framework had to enable a social and ecological transformation and that a reorientation was needed, from economic growth towards human well-being, the reduction of inequalities both across and within countries, and highly effective collaborative and democratic governments.

On this matter, Päivi Leino-Sandberg, from the University of Helsinki, focused on the relationship between democracy and parliaments, stressing that current rules could be made more democratic by increasing their ownership at national level, i.e. by explaining the reasons for measures and by clarifying the structure of competences (who does what).

Finally, Margarida Marques, Member of the European Parliament and rapporteur for the report on the revision of the EU's economic governance rules, which was approved in July 2021, concluded that building consensus among the different points of view, political families and social partners was of the utmost importance. Today's reality was completely different from the reality at the time of the Treaty of Maastricht and it was now important to assess whether those rules had worked or not. As they clearly lacked flexibility, new rules were needed.

On a final note, Dominika Biegon, rapporteur for the EESC opinion, added, Contrary to the commonly held view, the hearing has revealed that the EU fiscal framework can be significantly improved without changing the EU Treaties. We can end the chronic lack of public investment and give Member States more leeway to counter economic downturns adequately in the future. The EU institutions should not wait any longer and should propose pragmatic reforms to the EU fiscal framework as soon as possible, in order to pave the way for a sustainable recovery and a just transition.

All of these contributions will now feed into the EESC opinion, which is due to be adopted at the October plenary session and the recommendations of which will also be channelled into the Europe-wide discussion held in the framework of the Conference on the Future of Europe.