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Time to rewrite the European Fiscal Rules
Learn lessons from crash – need to act now
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 and meant that the European Union never fully recovered from the effects of the financial crisis.
European Union Member States themselves are already ignoring the SGP rules in order to deal with the Covid-19 crisis with fiscal-deficit and debt ratios set to rise dramatically as a result.
The EU must abandon the strategy of following the Stability and Growth Pact (SGP) and the Fiscal Compact. Both instruments were incapable of dealing with the fallout of the financial crisis and its aftermath a decade ago and they are certainly not capable of dealing with the health, social, economic and financial consequences of the current situation. While the decision to invoke the general escape clause of the SGP by the European Commission and ECOFIN is welcome, this merely serves to highlight how inadequate these fiscal rules are as we face into a an uncertain future and a potentially prolonged global recession. Without removing these rules countries will be saddled with the economic consequences of Covid-19 for decades to come.
Response at European level inadequate
Thus far the response at a European institution level has been wholly inadequate to deal with the crisis. The European Commission announced the ‘mobilisation’ of an additional €37bn through the Cohesion funds (this is recategorising unallocated funds within the European budget). The Commission also stated that ‘the budgetary effects of temporary fiscal measures taken in response to COVID-19 will be excluded when assessing compliance with the EU fiscal rules’. While this is certainly welcome, it still places responsibility for action on national governments and does not provide a European-wide response. The meeting of Eurozone Finance Ministers on 16th March merely noted the need for a coordinated response (without outlining what this might look like) and that ‘the SGP has the flexibility needed to cater for this situation and we will make full use of this flexibility in all member states’. This continued reliance on inadequate and inappropriate fiscal rules means that countries will potentially once again be subject to strict budgetary deficit rules and another round of austerity.
It seems incredible that there as yet has no decision to use the European Stability Mechanism (ESM) as a vehicle to provide a Europe-wide fiscal response. The purpose of the ESM (established in 2011 in the aftermath of the financial crisis) is ‘to mobilise funding and provide stability support under strict conditionality ….. if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States’. The ESM can issue European securities and should be used as a vehicle to do so in light of the recent calls (and tacit support across many EU Member States) for joint Eurobonds to deal with the fallout of the Covid-19 crisis. Viruses do not recognise border. and neither do they heed arguments regarding timing and moral hazard. An EU-wide fiscal response is essential. Europe cannot wait to act until it is too late.
The lack of a European-wide response by the European Commission and the fact that the ECB was forced into action only after remarks by its President caused a run on Italian government bonds make it clear that the lessons of 2008 have not been learned.
Over ten years on from the financial crash, and after six years of economic growth, and before the onset of Covid-19, there were:
- 16.8 million people unemployed in the EU
- 6.65 million people long-term unemployed (representing over 40 per cent of total unemployment across the EU, a cause for concern)
- 3.4 million young people aged under 25 unemployed (the highest rates are in Greece, Spain and Italy)
- 86 million people living in poverty (6 million more people than in 2008) - of whom over 19 million are children (one fifth of Europe’s children today are living in poverty).
The European Union has never fully recovered from the financial crisis and without substantial and coordinated action now, the current social and economic crisis could destroy it.
The European Social Model is needed now more than ever
A large increase in direct public spending and investment is one of the most effective tools available to European countries to address the current crisis. The SGP and the Fiscal Compact will prevent countries from pursuing the type of large-cale public spending required. They are not fit for purpose and must be re-written. European institutions were found wanting in the aftermath of the financial crisis and citizens bore the brunt. We cannot make the same mistake again.
The OECD has defined the current Covid-19 crisis as the third and greatest economic, financial and social shock of the 21st Century and states that the pandemic has set in motion a major economic crisis that will burden our societies for years. The OECD is calling for immediate, urgent and large-scale responses with a well-planned investment programme and decisive and ambitious actions to mitigate the economic downturn and protect the most vulnerable.
A strong response based on the European Social Model is required. To quote the OECD ‘this is all about people: older people and the young, women and men, those on low income or no income, those who were already facing a difficult situation and who will be hit hardest’.
People across Europe deserve better than the current response from European institutions. Without political vision and the capacity to act quickly, decisively and appropriately it is difficult to see how the European project could recover from the social and economic devastation that the Covid-19 pandemic will wreak if we do not act now. The European Union and its institutions must act now to prevent a repeat of the devastation of the financial crisis of 2008.