{"id":33903,"title":"Carving out a Compromise \u2013 Negotiations of new Fiscal Rules are Coming to a Close","link":"https:\/\/bst-europe.eu\/de\/investment-budget\/carving-out-a-compromise-negotiations-of-new-fiscal-rules-are-coming-to-a-close\/","date":"18. Dezember 2023","date_unix":1702918039,"date_modified_unix":1747997321,"date_iso":"2023-12-18T16:47:19+00:00","content":"

Years of economic underperformance, ill-advised austerity and a lack of resilience against economic shocks have led to the realization by decision-makers that fiscal discipline for the sake of it threatens to incapacitate the Eurozone countries. However, challenging the system of fiscal rules has proven a tedious task in the past. Instead, these inadequate rules have mostly been ignored or suspended as a way of muddling through. The last time the general escape clause was triggered was in the wake of the COVID crisis. Now, the imminent return to fiscal rules in 2024 has galvanised\u00a0a critical mass of proponents for a reform of the current dysfunctional framework. \u00a0<\/em><\/p>\n

Following the Commission\u2019s proposal earlier this year, member states in the Council and the European Parliament are in a heated debate over how to achieve a new set of rules. However, the ongoing debates in the Council and Parliament are posing a risk of further tightening the commission’s proposal. Without fiscal instruments at the EU level, these developments could not only threaten long-term economic growth prospects but also limit the national fiscal space required for sustainable investments. This, in turn, could jeopardise\u00a0the attainment of climate and transformation objectives. As the EU stands at a crossroads, the decisions made during the coming months are more than mere adjustments; they are essential steps to equip the Union with the tools necessary to face upcoming challenges and build a fiscal framework that enhances economic resilience. \u00a0<\/em><\/p>\n

A needed push for change<\/span>\u00a0<\/span><\/h2>\n

The key objective of the introduction of fiscal rules was to ensure fiscal and macroeconomic stability in the Eurozone by preventing excessive debt and deficits levels and restore confidence in financial markets to stabilise the Eurozone. The current set of fiscal rules was established within the Stability and Growth Pact (SGP) but has since suffered various tightening rounds in response to the financial and Euro crises between 2008 and 2015. However, their rigidity became especially apparent during the COVID pandemic, necessitating the temporary suspension of these rules through a general escape clause to accommodate much-needed, crisis-related stabilisation spending. <\/span><\/p>\n

Additionally, the current framework lacks a credible enforcement mechanism. Although member states generally managed to decrease their deficits upon entering the Excessive Deficit Procedure (EDP), public debt levels frequently remained unchanged or even increased by the conclusion of an EDP. <\/span>Notably, no member state has never been fined under this procedure.<\/span><\/a>\u00a0<\/span><\/p>\n

Not only have the fiscal rules proven to be too constraining and not enforceable, but they are also widely regarded as pro-cyclical and austerity enhancing, leading to chronic economic under-performance in the EU. In fact, since the euro crisis, <\/span>Eurozone growth rates have been negatively diverging from those of the US<\/span><\/a> which can be partly attributed to the lack of growth-enhancing investment caused by the austerity effect of fiscal rules.<\/span>\u00a0<\/span><\/p>\n

This austerity effect has also led to under-funding of infrastructure and social spending, especially in disadvantaged member states. This created, for instance, negative trade-off effects between public investment and cohesion funds, as shown by the recent 8<\/span>th<\/span> Cohesion Report by the EU Commission, which finds that „<\/span>a large part of public investment stems from EU cohesion funds rather than from member states themselves whose own investments are constrained by EU fiscal rules<\/span><\/a>„. But the negative effects of austerity-induced fiscal restrictions apply to the EU as a whole. Findings show that fiscal reforms since the euro crisis have left each European on <\/span>average \u20ac3,000 a year worse-off<\/span><\/a>. Looking ahead, the ever-increasing frequency of crises and global challenges requires a revamp to the current fiscal architecture. The economic shock of the COVID crisis, exacerbated by the energy crisis following Russia’s war against Ukraine, <\/span>has highlighted the urgent need for a robust and forward-looking debate on fiscal reform<\/span><\/a>.<\/span>\u00a0<\/span><\/p>\n

Against this backdrop, it appears that a critical mass has formed to push ahead fiscal rules reform. Member states, the European Parliament and the Commission are now striving for a reform agreement. <\/span>\u00a0<\/span><\/p>\n

The European Commission\u2019s proposal<\/span>\u00a0<\/span><\/h2>\n

The Commission <\/span>presented its legislative proposals for new fiscal rules<\/span><\/a> in April 2023. The main objective of this new set of rules is to reduce complexity and strengthen enforcement, while striking the right balance between ensuring debt sustainability and creating enough flexibility for much needed investment. Its main elements are:<\/span>\u00a0<\/span><\/p>\n