The debate about what to do with the EU’s broken fiscal rule book is heating up, as Europe’s governments face the prospect of a double-dip recession and soaring public debt and deficits that will take years to correct.
The European Fiscal Board, an independent body that advises the European Commission, made a notable contribution to the debate on Wednesday when it urged policymakers to grasp the nettle of reform and make the most of the Stability and Growth Pact’s temporary suspension during the Covid-19 crisis.
The EFB and its chair Niels Thygesen want the commission and eurozone finance ministers to use the next 12 months to address myriad complaints about the state of the SGP.
Before the pandemic struck, those criticisms centred on the byzantine complexity of targets built into the rule book and the overly generous interpretations given to high-debt countries by the commission. It was a subject that frustrated northern hawks, who wanted more discipline, as well as southern doves, who resented the targets.
With the onset of the pandemic, calls for change are getting louder, particularly from critics who want a fundamental reconsideration of whether a 60 per cent debt-to-GDP target and 3 per cent deficit limit are appropriate for a pandemic-hit world where eurozone debt is headed to 100 per cent of GDP.
Olivier Blanchard, former chief economist at the IMF, is among those calling for a root-and-branch change to the rule book. “We should be intellectually ambitious, not go for adjustments at the margin”, said Mr Blanchard this week. France’s Europe minister Clement Beaune seems to think the same.
But the politics remain treacherous. Given a worsening health situation and fresh restrictions on member states’ economies, there is a risk that reopening a debate on fiscal rules too soon may spook markets. The message that eurozone governments need to project right now is that fiscal support will remain in place as long as it is needed — not that they are getting submerged in a renewed battle on how to police ballooning public debt. So expect finance ministers to avoid getting embroiled in the debate over SGP reform for the time being.
What’s more, the commission wants to make sure it can push through the €750bn recovery fund — including ratification in national parliaments — before getting into divisive discussions on fiscal rules. Paolo Gentiloni, EU economics commissioner, said at an event on Tuesday that the commission would only put forward its own reform proposals once the process of approving the Next Generation EU programme was complete.
In a nod to just how politically sensitive the debate is, the EFB report seeks to offer practical reforms, not blue-sky thinking, that avoid opening the “Pandora’s Box” of treaty change.
The report says the debt rule can be intelligently applied by offering the highest debt economies, such as Spain and Italy, more time to reduce their borrowing burden. This would be a shift from the current standard metric of a 1/20th per annum reduction that is applied to all member states above the 60 per cent ceiling. The EFB also makes a call to avoid using the rules to punish much-needed investment spending.
Such reforms might appear eminently sensible — but that doesn’t account for the toxicity of the eurozone’s fissures over fiscal policy. For all the upheaval unleashed by the Covid-19 crisis, that is one dismal constant in EU policymaking that looks set to survive for a long time to come.
Chart du jour: Europe’s hidden deaths
In February, Spain’s chief doctor Fernando Simón was absolute when asked about Covid-19, saying: “There is no virus in Spain”. But even at that moment, the virus was spreading across the country and Spain was “flying blind” towards one of Europe’s worst outbreaks of coronavirus.
This misstep led to a huge gap in reported deaths from Covid-19, versus the mountain of excess deaths shown in the chart above. This is just one of the many revelations reported by the FT’s Europe network, as part of a series of investigations asking if the world could have been spared.
Europe news round-up
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Sweden has joined the US and the UK in banning Chinese telecoms companies ZTE and Huawei from building the country’s 5G network. Sweden’s foreign minister cited China’s aggressive spying and digital theft as key reasons for the ban. (FT)
The European Commission has launched legal action against Cyprus and Malta to try to put a stop to the countries’ practice of selling passports for cash. Brussels argues that “golden passport” schemes threaten the “essence of EU citizenship”. (FT)
Agriculture is one of the largest recipients of the EU’s multiyear budget money, receiving €387bn. An investigation by Der Spiegel finds the vast sums of cash are prone to profiteering after one MEP, Peter Jahr, crafted farm legislation that gifted him thousands in EU subsidies for his farm in Saxony.
The EU’s cyber security agency has detailed the challenges the continent faces online, including the strain caused by large portions of the continent now working from home. The agency’s annual report warns that increased dependence on the internet is creating numerous threats that have pushed Europe’s cyber security sector to its limits.
Coming up on Wednesday
EU budget negotiators from the parliament and council meet on Wednesday evening (17.30 CET) to try to thrash out a deal over the bloc’s €1.8tn budget and recovery fund.
After two months of clashes, the parliament has said it is sticking to a demand to increase spending by around €39bn. But as EU leaders made clear at their summit last week, the demands are a no-go.
mehreen.khan@ft.com; @MehreenKhn
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david.hindley@ft.com
Source: Economy - ft.com
