Covid has been good for the EU.
It is now both more cohesive and resilient as a result of the pandemic, compared to before it. But are EU policymakers on the verge of committing another historic fiscal mistake? Thread 1/
It is now both more cohesive and resilient as a result of the pandemic, compared to before it. But are EU policymakers on the verge of committing another historic fiscal mistake? Thread 1/
Two reasons explain EU’s greater resilience post-Covid
1) The creation of Recovery Fund (RF), which has enabled significant EU-wide borrowing, subsequently transferred to member states as grants. This is facilitating their economic recovery, without increasing their debts 2/
1) The creation of Recovery Fund (RF), which has enabled significant EU-wide borrowing, subsequently transferred to member states as grants. This is facilitating their economic recovery, without increasing their debts 2/
2) Populism has had a bad crisis. This is partly because of RF. Take Italy's case: It's hard to argue against €180bn (10.5% of GDP). Hence the nationalist far-right League led by @matteosalvinimi has largely shut up & entered into reform-oriented coalition led by Mario Draghi 3/
But Covid also exposed populist narratives: country-first solutions became implausible in a pandemic; anti-immigrant messages ran into the uncomfortable truth that immigrants work in essential, front-line roles & anti-expert sentiment fell as views of scientists > politicians 4/
Yet these gains - none of which were a-given 1-2yrs ago - risk coming undone if EU capitals mismanage the economic recovery. Key to that will be whether and how the EU’s fiscal rulebook - known as the Stability and Growth Pact (SGP) - is reformed 5/
Suspended during Covid under a provision known as “general escape clause” (GEC) the SGP is due to come back in 2023. For the uninitiated: the rules dictate that member states deficits & debt levels should not exceed 3% & 60% of GDP respectively & must fall quickly if they do 6/
If the rules don’t change, they will force member states into unprecedented fiscal tightening which would crash the economic recovery. So a public “reflection” of/on the rules, involving expert stakeholders, will be kicked off by @EU_Commission later this month 7/
There is little doubt about the conclusions that will emerge from this process: that emphasis of EU fiscal policy should shift away from austerity to growth, and that more attention should be paid to incentivising public investments in the EU's green and digital transitions 8/
How? Primarily by 1) simplifying & amending the “1/20 debt rule” that stipulates EU members must reduce their debt levels by difference between their debt/GDP ratio & 60% by 1/20 every year; & 2) excluding investments in high quality public goods from EU deficit calculations 9/
Some in Brussels & Paris would also like a much more decentralised system of fiscal governance, allowing member states to design their own fiscal adjustment path, with the Commission playing a referee - essentially drawing up consequences if national efforts should fail 10/
Sensible as these ideas may be, substantive negotiations on whether & how to amend the rules between EU capitals, @Europarl_EN @EU_Commission can only really begin once a new German government is in place. Based on events in Berlin, this could be as late as early next year 11/
But @EU_Commission operates, by EU law, an annual fiscal surveillance cycle: EU capitals must submit “Stability & Convergence Programs” - beginning to preview their budgets in the autumn for the year ahead - by 15 April 12/
If you're lost in all this process - fear not. The important takeaway is that @EU_Commission needs to provide a clear direction to member states about what the EU’s fiscal objectives for 2023 will be by mid April next year 13/
That leaves roughly 4 months, assuming a coalition is in place in Germany by the end of the year, to build some sort of consensus on what the EU’s forward looking fiscal orientation for 2023 should be. It is this truncated timeframe that fiscal hawks are attempting to exploit 14/
Lined up against meaningful changes to SGP are usual suspects - 🇳🇱🇦🇹🇫🇮 & @VDombrovskis - who remain keen to put high deficit/high debt countries above 3 & 60% & not decreasing - France, Italy, Spain, Greece, Belgium & others - into an “Excessive Deficit Procedure” (EDP) 15/
Again, for uninitiated, an EDP basically mandates, through negotiation & peer review, a degree of fiscal tightening for the country in question. Some in Berlin argue the COM could open multiple EDPs but stipulate a more gradual fiscal adjustment, given borrowing through Covid 16/
(Important side note: According to multiple senior EU officials & lawyers, the GEC suspends the “adjustment path” but does not suspend rules of SGP as a whole, so it is entirely possible to have the GEC in place and still open an EDP against a member state in breach of 3/60%) 17/
Reapplying the SGP would also sit well with other senior voices in @EU_Commission
that want a more orthodox implementation of fiscal rules & worry COM is always seen on side of leniency. Indeed, even reformers are not pushing for a further suspension of the rules in 2023 18/
that want a more orthodox implementation of fiscal rules & worry COM is always seen on side of leniency. Indeed, even reformers are not pushing for a further suspension of the rules in 2023 18/
Lined up against Dombrovskis are ECB, EU’s new Fiscal Board, a majority of College of EU Commissioners & imp @vonderleyen who wants a “real new set of rules for the medium term,” acc to one senior EU official with knowledge of her thinking “to facilitate the green transition” 19/
The overall position of Berlin is less clear, and will ultimately depend upon the identity of new Chancellor and coalition he leads. The risk is that an inexperienced Chancellor, consumed by coalition management & domestic politics, is more cautious & less ambitious in Europe 20/
This is why the French remain keen for some kind of consensus - not a final deal - under their Presidency in first half of next year.
Key to the strength of the reformers vs hawks will be the implementation of Recovery Fund reforms in Italy and France over the coming months 21/
Key to the strength of the reformers vs hawks will be the implementation of Recovery Fund reforms in Italy and France over the coming months 21/
The best-case scenario for those who want SGP overhauled would be for French Presidency to table concrete legislative proposals about what EU's new fiscal rules should be early next yr. Even w/out a deal, legal text would create more momentum & possibility for substantive changes
Otherwise @EU_Commission will have to issue “interpretive guidance” in March pointing to where they think SGP will end up. The purpose would be to give EU capitals enough latitude to interpret rules more flexibly - on basis of where they're heading not what they say today 23/
It's in this scenario that Northern EU fiscal hawks will pounce - pushing for member states to default to old rules while the new ones are negotiated. Most accept that idea of putting France into an EDP on heels of Macron’s Presidential election is unthinkable & unlikely 24/
But even if SGP isn't fully reapplied in a mechanical fashion in 2023, the outcome of talks - how much tightening & how fast - remains far from clear. Hanging in balance is the continent’s recovery, cohesion & credibility of its net-zero transition
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politico.eu/article/europe…
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