Let the European Union spend – POLITICO
Paul Taylor, editor-in-chief of POLITICO, writes the column “Europe At Large”.
PARIS – The rules of budgetary discipline in Europe, more honored in violation than in respect, are outdated, too complicated and increasingly misguided.
The EU would be better off bypassing the Stability and Growth Pact to promote public investment in the green and digital economy, rather than wasting energy trying to reform a complex legal framework that has consistently produced more good intentions than compliance.
Intended to reduce debts and deficits, the pact had to be suspended at the start of the COVID-19 pandemic, to allow governments to borrow and spend heavily to support households and businesses on respiratory assistance during the crisis. A safeguard clause allowing emergency spending to remain in effect this year and next.
What happens next is pending. The Commission announced this month that fiscal rules will be back in 2023. Brussels plans to hold consultations on how to reform the system later this year before making proposals to finance ministers.
The “consultations” underestimate the difficult negotiations ahead. Influential figures such as Italian Prime Minister Mario Draghi, European Commissioner for Economic and Monetary Affairs Paulo Gentiloni and French Minister for Europe Clement Beaune have all called for a complete overhaul of the regulation to support investments that boost growth and to differentiate the objectives by country rather than by country. impose universal goals.
Sadly, the odds of seeing sweeping reform that learns the lessons of what worked during the pandemic – as well as what went wrong during the eurozone debt crisis – are close to zero. The guardians of fiscal orthodoxy in Northern Europe will not accept it.
Anchored in the 1992 Maastricht Treaty that gave birth to the euro, the rules require governments to keep public debt below 60% of gross domestic product and cap their budget deficit at 3% of GDP. The reasoning was as follows: since the EU has a macro-economically tiny central budget and no wealth redistribution mechanism, each member state of the single currency must maintain sound public finances, in order to avoid adverse spillover effects for its partners. .
The 1997 Stability Pact, adopted under German pressure before the launch of the euro, aimed to give these limits some bite. It provided for progressive sanctions resulting in heavy fines for countries that repeatedly miss targets. They have never been applied despite the serial violations by southern European countries and have long since lost all credibility.
The whole debate, according to economist Nicolas Veron of the Bruegel think tank and the Peterson Institute for International Economics, is “a political theater of the absurd without consequence.
“The lesson from the 22 years of the euro’s existence is that sanctions will never be activated and will not serve as a deterrent, even in extreme cases. Therefore, all fiscal rules are a paper tiger, ”he said.
Many economists say the Maastricht criteria were designed for a bygone era of rising interest rates, inflation and growth. This is no longer appropriate at a time when borrowing costs have fallen, the European Central Bank is sucking government bonds, inflation is persistently low, and growth potential has also declined. Treaty limits are simply not realistic today, with Italy’s national debt falling from 130 to 160 percent of GDP during the pandemic, France and Spain’s from less than 100 to 120, and that of Greece from 185 to 210%.
However, changing the criteria would require amending the EU treaties with the unanimous agreement of every EU government and parliament – unlikely given that advocates of EU fiscal discipline are reluctant to give up the weapon. the most important in their arsenal.
Irish Finance Minister Pascal Donohoe, who chairs the Eurogroup of Finance Ministers, has ruled out calls from experts – including former IMF chief economist Olivier Blanchard – to replace the pact with budget standards setting general objectives adapted to each country, supervised by an independent national budget. boards, rather than implemented by the Commission or EU ministers.
Fortunately, there are changes that could be made without changing EU law or painstakingly rewriting a treaty. For this we can thank the Austrians.
In the 1990s, Vienna found a way to bypass EU debt limits by setting up a state-owned company. Called ASFINAG, it exists to build and maintain Austrian highways – a massive project with borrowing equivalent to around 5% of GDP. At the time, Austria struggled to meet the criteria for euro membership, making any kind of spending a subject of nervous monitoring.
But the state-guaranteed borrowing in capital markets was not considered public debt, as it was fueled by dedicated revenue streams, from road tolls and an annual fee for cars. ASFINAG even pays a small annual surplus to the state. Clever.
“It was created to circumvent the pact and allow investment,” recalls Franz Nauschnigg, the economist who helped develop the project. “It is self-financing and has given us a very modern road network at a better price than if you did it through public-private partnerships.”
The German Bundesbank, tenacious of budgetary rectitude, has challenged this off-balance sheet borrowing vehicle with the EU Statistics Office. But Eurostat maintained the exemption of the Austrian model from the calculation of “public debt”. Berlin has since adopted a similar system for Construction and maintenance of German highways through a company called Autobahn GmbH.
“You could do the same to fund public investments in smart energy grids, solar parks, trans-Mediterranean power cables or high-speed broadband,” said Nauschnigg, who presented his ideas in Brussels, Paris, Berlin and Rome. “This could be done at EU level, or by creating a system of national ASFINAGs that are articulated.”
The idea of putting more bracketing Public investment outside of budget constraints gained ground in the campaign for Germany’s September elections, as politicians debate whether and when to reactivate the constitutional ‘debt brake’ that severely limits borrowing public.
The Greens, neck and neck with the conservative CDU / CSU in opinion polls, have proposed a public investment fund of 500 billion euros for the transition to clean and renewable energies. The center-left Social Democrats, while advocating a rapid return to the so-called “Schwarzer Null” debt limit, also want to exempt certain categories of investments from the calculation.
All of these schemes aim to avoid repeating the mistakes of the EU’s response to the eurozone crisis, when synchronized austerity caused the collapse of public investment, triggering a double-dip recession, reducing the potential for growth and exacerbating a private sector investment gap.
What not to like?
Well, the changes are sure to spark a fight over what constitutes good debt and bad debt. Some countries, like France, have long advocated excluding defense equipment purchases from debt calculations, for example. Others argue that education spending is the most growth-friendly investment – and should be exempt.
Tax hawks, meanwhile, warn that financial markets – the ultimate arbiter of a country’s debt sustainability – will not long be fooled by creative accounting.
As conservative German MEP Markus Ferber puts it, “Debt is debt. Of course, it matters if I borrow to pay for a nice vacation or buy a car to get to work. But I caution against opening a public debate on good and bad debts. We have to look at the reality of debt sustainability. ”
The fundamental problem, Ferber said, is that countries like France and Italy haven’t cut their debt in the right times and will struggle when interest rates rise. This is a good point, and Europe will continue to need sensible rules to balance current spending and revenue. But it should not prevent the EU from circumventing obsolete debt ceilings to promote vital public investment.