the time of automatic austerity is now really over

Finance Minister Kaag in Brussels earlier this week, flanked by her colleagues Annika Saarikko (Finland) and Nadia Calvino, the Spanish Minister of Economic Affairs.Statue Kenzo Tribouillard / AFP

The European Commission has gone a step too far to apologize for the austerity measures caused by the Stability Pact. This does not alter the fact that she is proposing to relax European fiscal rules. Countries with a high government debt will have more time to reduce that debt mountain. Is the era of austerity coming to an end?

According to MEP Paul Tang (PvdA), yes. “The Brussels austerity obsession is over,” he exulted on Wednesday after the Commission presented its ideas. His colleague Bas Eickhout (GroenLinks) spoke of ‘a good start’. He also believes that Brussels has finally learned from the policy mistakes of the euro crisis. Now the Netherlands is still there, both MEPs sighed.

The praise from the left will do the Commission good, because it is doubtful whether the finance ministers of the euro countries – when they discuss plans – will be just as enthusiastic next month. German Finance Minister Christian Lindner’s initial reaction was downright cool: he’s willing to talk about it but ‘not sure’ whether the new rules meet German budgetary discipline requirements.

Maastricht

Everyone agrees on the need to adapt the Stability Pact – in which European fiscal rules are anchored. The pact dates from 1997 and in the run-up to the introduction of the euro gave substance to the agreements in the Maastricht Treaty (1992) about the famous deficit rule (financial deficit member states is a maximum of 3 percent of gross domestic product) and the debt rule. (maximum government debt of 60 percent). Rules – according to the then Minister of Finance Wim Kok ‘set in marble’ – to make the euro a hard currency.

‘Times have changed quite a bit since Maastricht’, said Commission Vice-President Valdis Dombrovskis when the plans were presented. The euro crisis (2009-2015) painfully showed the failure of the Stability Pact. Member States had systematically ignored fiscal rules but were not penalized, banks struggled with junk credit, the pact did not provide an emergency fund and forced austerity measures that throttled growth.

The recession caused by the corona pandemic and the economic misery after the Russian invasion of Ukraine (exploding energy prices and inflation) are causing the national debt of member states to rise again. Especially in countries where it has been too high for a long time: Greece (186 percent), Italy (148 percent), Portugal (120 percent), Spain (115 percent), France (111 percent).

The Commission is walking on eggshells in the revision of the pact. She only gave an “orientation” on Wednesday. Legislative proposals will only follow once the member states agree on this. Next spring at the earliest.

‘Unrealistic’

The Commission wants to get rid of the ‘unrealistic’ debt reduction rule. The ceiling of 60% will remain in place – after all, it is laid down in the Treaty of Europe – but Member States will be given more time to get below that limit. The rule that the extra-legal debt (anything above 60 percent) is reduced in twenty years, disappears in the trash. That 1/20 rule, introduced in 2011 to soften the hard ceiling, would lead to severe austerity measures at current debt levels in Greece and Italy.

The Commission proposes that Member States with over-indebtedness draw up their own action plan; a strict timeline is no longer necessary. However, a country must adhere to the plan once agreed (and approved by the EU). The fines for violations are considerably less severe than the current sanctions (partly due to the height never applied). “We are reducing the fines so that they can be imposed more effectively,” the Commission explains.

Not unimportantly, the Commission gives countries extra time (up to three years) to reduce their debts if they invest in green or digital projects, and reform (for example the pension system). No golden rule, with some categories of public investment not counting as government debt. That was “too controversial”, according to Commissioner Paolo Gentiloni (Economics), especially in Berlin. But earning extra time through investments to reduce debt has the same effect, he says.

Kaag

Minister Sigrid Kaag (Finance) sees ‘many positive elements’ in the Commission proposals. Not surprisingly, they resemble the ideas that Kaag put on the table earlier this year with her Spanish colleague Nadia Calviño. She does, however, emphasize the need for effective supervision: fewer exception clauses, rather in the penalty box.

The heaviest resistance comes from Berlin, Brussels expects. Lindner pointed to rising interest rates on Wednesday, so countries would do well to reduce their debts. What the German minister fears most is that member states will reach an agreement with Brussels in their national plans.

Nevertheless, the time of automatic austerity is over. That is not due to the new Commission plans, but is the lesson from the euro crisis. The corona recession was fought with hundreds of billions of euros of extra government spending. The EU countries are now doing the same to keep energy bills affordable. And Germany is fully involved in this.

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