Thread by @AndreiSterescu

1/8 Policymakers in 🇪🇺 are facing a set of (self-imposed) constraints in assuring a succesful recovery from #COVID19. Member States will have to i) meet increased spending needs while also ii) containing higher debts and deficits iii) without significant tax hikes. A 🧵.

2/8 The biggest open question is how governments hope to fund huge investments needs to support the recovery and the dual green and digital transitions. Normally, higher spending would require that Member States either take on more debt or increase taxes.

3/8 But the @EU_Commission's economic governance review and several frugal Member States have already emphasised the need to reign in higher deficit and debts and raising taxes might prove to be politically difficult. This trilemma will be one of the main concerns going foward.

4/8 The trilemma is most obvious in Germany's 🚦coalition paper. The @fdp have won concessions on maintaing the debt brake and no tax rises. At the same time, all three parties have expressed the need for additional investment and public spending.

5/8 One proposal for circumventing the debt brake and avoiding tax increases is to set up an off-balance sheet instrument or use the @KfW. Another, proposed by @DezernatZ, is to tweak inputs to calculations of potential output. Also relevant for the SGP.

dezernatzukunft.org/a-new-fiscal-p…

6/8 Another idea is special treatment for certain types of investment. @ZsoltDarvas and @GuntramWolff have recently proposed exempting net green public investment from deficit calculations. Investment write-offs seem like the most popular option so far.

bruegel.org/2021/09/a-gree…

7/8 Finally, a more preferable solution would be joint EU borrowing via a new facility or even widening the scope of NGEU/ RRF. This would solve both the need for increased investment and help rein in national debts. The COM could also interpret current rules more flexibly.

8/8 All in all, as @MESandbu put it, the conundrum of how to mobilise ambitious investments within rules that discourage is the same at the national level and the EU-level. Similar solutions should be sought after at both levels.

ft.com/content/da522a…

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