New times, new rules. After years of debate and analysis, Brussels today presented its long-awaited proposals to modernize the application of the European Union’s tax rules and ensure that the adjustments leave room for member states to make investments in key sectors, such as the digitization or the energy transition. The magnitude of the changes proposed by the European Commission, to the liking of countries such as Spain or France, has instead put Germany and other northern countries on guard and, although the final proposal includes several safeguards that would guarantee a minimum of annual fiscal adjustment , stormy debates between the European finance ministers are predicted.
The reference thresholds are not touched -the famous ceilings of 60% for the debt and 3% for the deficit, never really applied- but Brussels plans to leave behind the approach of the past, which consisted of requesting an annual adjustment level similar to all countries (1/20 of all debt above 60%), and agree with each member state on an individualized reduction trajectory, depending on the starting situation of each one, more “gradual and realistic” than those that were applied now. The multiannual adjustment plans will be proposed by the member states and negotiated with the European Commission, but they will require the endorsement of Ecofin (the council of European Economy Ministers) to be adopted.
The reference value will become net annual spending (a figure in which interest payments and unemployment benefits are not included) and what will be measured each year will be the possible deviations from that objective. In addition, the fiscal consolidation path can be made more flexible and extended from 4 to 7 years if investments are made in key sectors, such as digitization or the energy transition, and a national escape clause is also provided for, in the event of a natural disaster, would make it possible to temporarily suspend the application of fiscal rules in a specific country.
In previous political debates, Berlin accepted these approaches but called for the inclusion of an emergency brake that would allow Ecofin to intervene in certain cases and apply a “common quantitative indicator” that would allow a minimum level of cuts to be imposed on all countries and just yesterday the finance minister, the liberal Christian Lindner, asked in a press forum that the new rules be tougher than the previous ones. Brussels has analyzed several proposals in this regard and, according to community sources, the result was counterproductive since the cuts would end up stifling growth and therefore increasing the debt.
The final version of the proposal adopted today by the college of European commissioners includes, however, some limits to its promises of fiscal flexibility. The path of adjustment throughout the agreed period must be downward and allow the 3% to be set at the end of it. If a country gets an extension, debt cuts will need to be concentrated in the early years. Another key condition is the obligation that net annual spending does not exceed the GDP growth potential forecast for the period of the adjustment plan. And countries whose deficit exceeds 3%, as is currently the case in Spain, will be asked for the cuts to represent a fiscal adjustment equivalent to 0.5% of GDP each year.
Despite these safeguards, it is a true paradigm shift from the current system, “the biggest reform of the EU’s economic governance rules” since the financial crisis of the past decade, in the words of the European Commission. In addition to the lessons learned from the strict application of the stability pact during the euro crisis, an austerity cure now unanimously recognized as having exacerbated the crisis, community services say they have learned from the “lessons” of managing the pandemic, when the application of fiscal rules was suspended and the EU launched a macro investment plan, decisions that have allowed the club to recover its previous income levels much faster than then.
“Many things have changed since we agreed on our fiscal rules in the 1990s. We live in a very different world from 30 years ago, there are new challenges and new priorities,” argued the Commission’s vice-president, Valdis Dombrovskis, at a conference today in Brussels. Public debt, he recalled, has grown strongly and last year reached 84% of European GDP, compared to 20% 20 years ago, before the financial crisis. Although the pact served to consolidate the monetary union, “its shortcomings are evident, whether you look at the growth of the debt, the levels of investment or the economic growth of the last two decades,” added the European Commissioner for the Economy, Paolo Gentiloni.
In parallel, “the EU faces massive investment and reform needs to make the green transition, strengthen our social and economic resilience and ensure long-term energy supply”, hence the proposals, Dombrovskis stressed, “incentivize reforms and investments”. The new approach, Gentiloni has defended, will allow the member states to feel the adjustment plans are “their own” and will make the process more credible, also in the application of the foreseen punishments. In case of deviations, procedures will be opened for excessive deficit that can trigger the imposition of fines. The sanctions will be less than now (but they have never been activated) but more “realistic” and therefore more applicable. Its cumulative nature is intended to encourage countries to correct deviations as soon as possible.
The proposals now go to the Ecofin table, where the ministers have proposed to close the reform this year. Spain will play a leading role in organizing these debates, since from July 1 of this year it will occupy the rotating presidency of the Council of the Union. From the European Parliament, which only has the power of codecision in one of the three legislative proposals presented today, the European People’s Party has demanded more harshness in its application, while the Greens have warned the Council against the risk of repeating past mistakes in sight of the position of some countries, which want to limit the room for maneuver to increase spending.
