This article is authored jointly by Chiara Martinelli, Director at Climate Action Network (CAN) Europe, Juliana Wahlgren, Director at European Anti-Poverty Network (EAPN), Patrizia Heidegger, Deputy Secretary General at European Environmental Bureau (EEB), Ludovic Voet, Confederal Secretary at European Trade Union Confederation (ETUC) and Rareș Voicu, President at European Youth Forum.
The EU is once again preparing to suspend its freshly reformed fiscal rules. At a recent Extraordinary Summit on Ukraine and European defence, EU leaders welcomed the idea of activating the national escape clause of the Stability and Growth Pact, allowing countries to ramp up military spending despite existing budget constraints.
Partial suspension of the Stability and Growth Pact is not enough
The EU fiscal rules have been suspended for four years to allow sizable public spending in response to the pandemic and the energy price increase following the Russian invasion of Ukraine. Only a few months after agreeing on new fiscal rules, EU institutions are preparing to suspend them again. This striking move exposes a deeper reality: Europe’s fiscal rules are not fit for purpose in the 21st century. Instead of forcing governments into unhealthy trade-offs between defense, climate action, and social protection, the EU must rethink its entire approach to fiscal policy.
The Fiscal Matters coalition, prominent economists, senior civil servants and think tanks have long argued that these rules are poorly designed. They are rooted in arbitrary GDP-based indicators and pay little attention to the quality of public spending. Had they remained in place, these rules would have blocked the EU’s response to COVID-19 and the energy crisis. Today, they arbitrarily constrain public spending, and incentivise unhealthy trade-offs. Despite marginal improvements, the reformed EU fiscal framework is locking Europe into a rigid budgetary straitjacket amid unfolding social, environmental, and geopolitical crises.
Risk of trade-offs between equally important existential threats
While on paper, the activation of the escape clause for defence does not require cuts in other national spending, this may de facto happen, especially in the 13 Member States that already have a debt above 60 % of their GDP and may be wary to further increase their debt stock. Governments may end up cutting national spending in important priorities to finance defence. Cuts in public services and in official development assistance are already happening in several Member States.
Risk to increase economic divergence between European countries
The Extraordinary Council also called on the Commission to propose additional possibilities and incentives for Member States in using their current allocations under EU funding programmes to finance defence. It is essential to ensure that funding is not redirected in a way that deepens disparities and creates a two-speed Europe. In fact, Ursula Von der Leyen already suggested diverting cohesion policy funds towards defence, which is highly problematic as these funds are supporting less prosperous EU countries and regions to reduce economic, social and territorial disparities.
We live in an era of polycrisis. These crises span different areas–economic, political, environmental, climate, and social – and are deeply intertwined, making it ineffective to address them in isolation. We welcome that the EU remains committed to supporting Ukraine until a comprehensive, just and lasting peace can be reached. But there are also other existential threats: the climate crisis, collapse of biodiversity and social inequalities threaten the very foundations of our future and our democracies. Extreme weather events like floods, wildfires, and droughts already cost the EU €162 billion between 2021 and 2023, an amount expected to increase. Germany’s federal intelligence service (BND) warns that resource conflicts and climate-driven instability will pose major security risks over the next 15 years. Europe can’t afford to unlock fiscal space only for defence spending. Many green and social investments offer a triple dividend for governments: they curb emissions, boost economic activity, and reduce future liabilities and risks. We owe them to current and future generations.
Establishing an EU funded Investment Facility, with effective social and environmental conditionalities when funding goes to companies, is key to help bridge the public investment gap necessary to make our economy sustainable, climate-proof, and thriving for people and workers.
Who will pay for it? Closing the financing gap
The financing gap is huge. Private finance will have to shift away from fossil fuels and socially harmful investments – thereby the importance of preserving the integrity of the EU taxonomy listing environmentally sustainable economic activities, and strengthening financial regulation. Monetary policy can also help lower the price of private capital by, for example, implementing green dual rates.
Public finance also has to play its part. Eurogroup President Paschal Donohoe recently declared that despite steep increases in defence investments, the eurozone’s “overall fiscal stance” this year is still expected to be “slightly contractionary” as agreed by finance ministers in December. Spending more on defence while reducing the debt and deficit-to-GDP ratios inevitably means cutting other spending priorities – except if new revenues are raised through taxation. To avoid making choices between equally important priorities, governments must raise new resources in a fair way to deliver on their ambitions, possibly through taxes coordinated at the EU level to minimise tax avoidance and profit shifting.
Ordinary people, already bearing the brunt of inflation, must not be asked to fill the financing gap. Rising living costs are consistently identified as the top concern for Europeans, including young people. New taxes will have to focus on extreme wealth and excess or windfall profits, including the profits of the fossil fuel industry.
As EU Heads of States and Governments meet on March 20-21, they face a defining choice: bold action or continued failure. The stakes couldn’t be higher.
