Economic governance in the euro zone has been based on demanding three objectives from the governments of the countries that are part of said economic area. The first, that the public deficit does not exceed 3% of the country’s GDP. The second, that the ratio of public debt to GDP does not exceed 60% and, thirdly, that the structural budget is balanced. These conditions have not passed the tough test of particularly adverse economic situations. The pandemic and its unwanted economic effects caused its application to be suspended in 2020 and member states were allowed to use national budgets as they saw fit as a countercyclical instrument. However, the economic recovery of the euro zone countries, despite the uncertainty generated by international conflicts, has driven the need to propose new economic governance rules, which should be agreed upon in the second half of this year.
The European Commission released a legislative proposal on the rules of the new economic governance, on April 26, which is based on negotiating between the Commission and each Member State a reduction in debt, without defining quantitative objectives common to all of them. countries, in a period of four years, which can be extended to seven as long as the fiscal corrections are carried out in the first years of said period. Despite this, the long-term objective of 60% public debt in relation to GDP will continue to be the reference value. In a complementary manner, the Commission proposal introduces the obligation for member states with a deficit greater than 3% of GDP to reduce it by at least 0.5% each year until they are below the aforementioned 3%.
Despite the increase in flexibility it introduces, the Commission’s proposal does not prevent the measures adopted from having a procyclical nature, as already happened during the Great Recession, as suggested by the maintenance of numerical objectives, without any scientific justification. In a positive sense, it should be noted that public investments to promote digitalization, environmental sustainability, defense and social cohesion can be considered outside the rules of the new economic governance. The need to integrate the ECB’s policies in relation to interest rates or the acquisition of public debt of member states into the analysis of debt sustainability is also noted. Finally, it would also seem appropriate to give a greater role to national and European parliaments in determining assumptions about debt sustainability.
We will have to hope that the necessary new fiscal rules do not repeat the mistakes of the past and that the debate within Ecofin allows the different positions of its members to be reconciled.
