Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a professor of public policy at the LSE, a senior non-resident fellow at Bruegel and a former member of the European parliament The reform of the EU’s fiscal rules agreed in December ignores the fundamental fiscal and political realities of member states. For this reason, the new rules will not work.The deal struck last month, which still has to be partially negotiated by the European parliament, maintains the Maastricht treaty’s 60 per cent debt and 3 per cent deficit ceilings, but significantly alters the Stability and Growth Pact which implements them. The key novelty is the introduction of country-specific spending plans, based on a debt sustainability analysis by the European Commission and negotiated bilaterally with each member state. In addition, the rules include two key safeguards: a debt sustainability safeguard ensuring debt reduction over the adjustment period, and a “deficit resilience safeguard” mandating fiscal adjustments beyond the 3 per cent treaty limit to a margin of 1.5 per cent of gross domestic product.Economically, these rules represent a commendable effort to adapt spending paths to the conditions in which individual states find themselves, and to focus on net growth in expenditure and a debt anchor based on sustainability analysis. But they do not solve the problems that bedevilled previous iterations. Member states have tried to reform the Stability and Growth Pact, introduced in 1997, several times before. These changes failed not because the proposed new rules were bad, but because there was nobody capable of monitoring and implementing them. This was clear as early as 2002, when the first breaches and attempted sanctions occurred. The commission’s initial proposal this time around, put forward in April 2023, included one element designed to improve buy-in (and hence compliance) by member states: a monitoring role for national independent fiscal institutions, which would have to assess the extent to which government plans complied with the agreed spending path. Unfortunately, this element was missing from the final package.Without this, the new rules make the politics much worse. The reliance on bilateral negotiation between the commission and each member state is now explicit. And it is hard to imagine the former not yielding to pressure, particularly from large member states. Additionally, the seven-year implementation horizons stipulated in the new rules extend beyond typical political cycles. It is unlikely, for instance, that the commission would force a government elected with different priorities in the middle of the seven-year cycle to implement policies agreed by its predecessor. The framework is also vulnerable to manipulation through creative accounting and over-optimistic growth assessments.A good example of the commission’s inability to prevail in bilateral negotiations is the failure to implement reforms under the €750bn NextGen EU bond issuance plans. On this occasion, Brussels had a stick with which to threaten non-complying countries. Yet as economists Tito Boeri and Roberto Perotti note in a new book on Italy’s plan: “Almost all these reforms were, already on paper, less ‘epochal’ than successive governments wanted us to believe; in addition, their implementation has been in some cases disappointing, in others a total failure.” The EU is running out of space for creative accounting. Instead of yet more rules, it needs a central treasury able to raise taxes and commit spending on Europe-wide public goods, including defence, innovation and climate change mitigation. Until the EU (or a subset of countries) can do that, the bloc will continue to find itself vulnerable to external shocks, full of unrealised potential but lacking in the purpose and direction needed to succeed in an increasingly complex and hostile world. More
