The European Commission published the Annual Sustainable Growth Survey (ASGS) in November 2021 which launched the 2022 European Semester cycle. This publication confirmed the on-going gradual shift of economic policy coordination from dealing with the COVID crisis to laying the foundations for a transformational and inclusive recovery and stronger resilience, in line with the EU’s goals on climate and digital transition and ‘competitive sustainability’.
The Annual Sustainable Growth Survey outlines the challenges which faced the EU pre-pandemic:
The EU economy already faced several long-term structural challenges before the COVID-19 crisis. Despite pre-pandemic improvements in labour market performance, a rapidly-ageing population threatened to eventually reduce labour supply and thus EU growth potential. The very substantial socio-economic costs of climate change were manifesting themselves with increasing clarity and urgency. Rising income and wealth inequality, territorial disparities within and among Member States, and unequal access to education and skills, were holding back economic growth and creating strain in the EU’s social fabric.
The European Commission notes that the COVID-19 crisis has accelerated the digitalisation of our economies and societies. However, a significant share of the population has weak digital skills and faced difficulties in accessing the new digital environment, with risks of widening social divides. The crisis has also highlighted the gap between well-connected urban areas and rural or remote areas.
Boosting socio-economic resilience is essential to improve Europe’s growth potential and job creation and to reach the Sustainable Development Goals. Resilience is the ability to withstand and cope not only with challenges but also to undergo transitions in a sustainable, fair and democratic manner. Effective and well-designed active labour market policies and social protection systems, investment in education and skills, and sound public finances can strengthen resilience and increase potential growth. Full implementation of the 2030 Agenda for Sustainable Development remains a key factor in strengthening resilience and delivering on the twin transitions.
Public finances took a considerable hit as a result of the severe recession and the necessary policy response, with increased fiscal divergence between Member States. Deficits and debt ratios have soared in all Member States, with the EU headline deficit increasing to about 7% of GDP in 2020 from 0.5% of GDP in 2019. Deficits and debt ratios are expected to remain above pre-pandemic levels in the coming years.
The COVID-19 crisis has further underlined the challenges facing the economic governance framework. Some of the key areas highlighted in the ASGS are:
- Public debt ratios have increased further, highlighting the challenge of a gradual, sustained and growth-friendly reduction to prudent debt levels.
- Public investment will need to be sustained at high levels for years to come, highlighting the importance of a good composition and quality of public finances to ensure sustainable and inclusive growth.
- Counter-cyclical discretionary fiscal policy, together with temporary EU fiscal support tools, has proved highly effective in cushioning the impact of this exceptional crisis in a timely and efficient manner, highlighting the importance of creating fiscal room in normal times for deployment in times of crisis.
- The rapid evolution of the crisis illustrated the difficulties associated with using indicators that are not observable and attempting to design rules that seek to cater for all possible circumstances.
These key areas point to the need to ensure that the current review of the economic governance framework takes into account the need to have flexibility within the fiscal framework, the need to support not inhibit national investment, the need to use indicators and measures that are relevant and to include social, environmental and economic indicators into this process and a Social Imbalances Procedure as a very minimum.
The Annual Sustainable Growth Survey highlights the challenges presented to the EU and to many members states as the general escape clause of the Stability and Growth Pact, essentially a brake on the fiscal rules which was applied as a result of the pandemic, looks set to be revoked. The impact of this, combined with a renewed focus on debt and macro-economic imbalance procedures will be challenging for many member states, not least Ireland. The current public consultation on a review of the EU economic governance is an opportunity for stakeholders to give their input on the changed circumstances for economic governance in the aftermath of the crisis and changes to enhance the effectiveness of the economic framework.
European fiscal rules should accommodate and indeed encourage, when appropriate, investment as a basic tool of economic policy within the capacity of governments. The Stability and Growth Pact and the rules regarding budget deficits have had the opposite effect and inhibited investment in many EU Member States at a time when investment in public services and infrastructure would have meant much-needed employment and economic stimulus. This undermined the European Social Model. These rules were rightly suspended as a result of the pandemic. However, if reintroduced without significant reform they will simply serve to undermine the principles of the European Pillar of Social Rights, and the delivery of the digital and green transitions, both of which require significant investment at member state level.
The Annual Sustainable Growth Survey points to the importance of a well-functioning Macro-Economic Imbalances Procedure. If the Europe is serious about delivering on the digital and green transitions, a fair and inclusive recovery from the pandemic and on the 20 principles in the European Pillar of Social Rights then a Social Imbalances Procedure must be incorporated into the revised economic governance framework, ensuring that social challenges such as increased poverty, precarious employment and high levels of youth unemployment are given the same prominence in the European Semester as economic challenges.
Proposals for economic governance review
The European institutions must work together to ensure that the European Social Model is strengthened and becomes the foundation for the future of Europe that is sustainable, and that delivers social rights for all. In the wake of a devastating global pandemic, it is now clearer than ever that alternatives are needed.
Ensure Greater Coherence of European Policy by acting on the von der Leyen Commission’s recent decision to integrate the UN Sustainable Development Goals and the European Pillar of Social Rights into the economic processes of the European Semester.
The priorities of Annual Sustainable Growth Surveys should provide greater focus on long-term social objectives, and on building adequate, effective social systems that include both investment and protection dimensions and are better aligned to the EU Social Investment Package and the new European Recovery Fund. This could be facilitated by:
- Making the European Pillar of Social Rights enforceable through legislative initiatives and turning it into a strategic tool to influence EU macroeconomic governance.
- Supporting efforts to promote growth and jobs while meeting deficit reduction targets in the medium rather than the short term.
- Taking greater account of social impacts when making Country Specific Recommendations, especially those requiring fiscal consolidation measures.
- Making country-specific recommendations that seek to achieve reductions in poverty and unemployment where rates are high or rising.
- Including a Social Imbalances Procedure in addition to the existing Macro-Economic Imbalances Procedure.
Address inappropriate EU governance structures that prohibit or inhibit legitimate investment by national governments.