Call by 180 unions, civil society, think tanks and academics for democratic reform of EU fiscal rules

Financing the transition

17 October 2022, Brussels: On 26 October, the Commission will present an orientation paper that will propose a direction for the reform of the European economic governance framework. Ahead of the publication 180 unions, civil society, think tanks and academics have come together to call for a new set of principles which aim at an economy that works for us all, scales up green public investment and promotes human and environmental wellbeing. 

A cornerstone of the European economic governance framework are the fiscal rules. These fiscal rules were established in 1992 when the EU member states enshrined deficit and debt limits in the Maastricht Treaty. In other words, the fiscal framework defines how much governments are allowed to borrow and spend, the objective being to contain some of the risks that come with being part of an incomplete monetary union, such as the risk of an economic crisis spreading from one country to another.

From the very beginning, EU fiscal rules have been prone to controversy and over the years, have undergone several reforms. A core area of contention is debt sustainability. Under the framework, member states are required to keep budget deficits below 3% of GDP and public debt below 60% of GDP. This overly rigid framework was largely responsible for devastating austerity following the global financial crisis. By choking off government spending following the 2008 crisis, aggregate demand fell, and economic output declined, which resulted in permanent economic scarring, reducing household income and stifling employment, particularly for those on the lowest income.

In response to the Covid-19 pandemic, policymakers took steps to avoid the mistakes of the past. The Stability and Growth Pact, one of the core components of the European fiscal framework, was suspended and the Recovery and Resilience Facility established, allowing governments to increase investment to support their economies through challenging times. In response to the economic impact of the war in Ukraine, the Commission decided to further extend the suspension of the fiscal rules until the end of 2023. While important actions were taken by legislators in the short term, recovering from the economic fall-out of the pandemic and this terrible war will require a fundamental overhaul of fiscal rules that are no longer fit for purpose.  

The fiscal framework in its current form is blocking progress towards achieving our social and environmental goals. Today, the EU is in dire need of private, but also public investment. Pre-pandemic, the EU had a social infrastructure investment gap estimated at least 142 billion per year, which will have only become more severe. Given the climate crisis results in permanent effects, rather than temporary ones that can be remedied, preemptive spending and investments are needed to limit the worst effects of the Ecological Emergency. But the EU Commission’s most recent estimate of the ‘green investment gap’ is €520 billion per year. Other estimates suggest investments of up to €855 billion (excluding transport) in the EU27 could be required to tackle climate change alone (thus precluding investments needed to thwart wider environmental breakdown). 

We have heard some positive signals from the Commission in the last weeks regarding significant reform of fiscal rules. The President of the European Commission, Ursula von der Leyen tacitly dissociated herself from the era of austerity by suggesting that the Covid spending packages not only offered a “boost to our economic confidence” but also a model for dealing with the present energy and environmental crises. As reported by Politico on 7 October, the Commission appears to be moving towards a country-specific debt “trajectory that allows adjustment in public finances, consistent with ‘good’ government spending and reforms, hand in hand with more enforcement”. The Commission has also indicated that it will get rid of a requirement to reduce debt by 5 percent per year if a country’s debt exceeds the 60 percent threshold. 

Despite positive signals, concerns remain over how changes to the EU fiscal rules will be carried out. Changes to the fiscal framework will have a significant impact on our economies and societies for years to come. Risks exist that disagreement among Member States may lead the Commission to only suggest tweaks to the Stability and Growth Pact’s interpretative guidance. Reform of such importance must not happen behind closed doors and instead should follow a democratic and transparent process that includes a formal role for the European Parliament. In other words, it should follow the ordinary legislative procedure.

In the letter coordinated by Fiscal Matters, 180 unions, civil society, think tanks and academics make the argument that EU economic policy no longer delivers for the European people and nature with persistent inequalities, a growing green investment gap and ongoing environmental degradation. The letter argues the need to adopt a long-term economic mindset allowing the next generation to enjoy better public services, lower inequalities, and healthy ecosystems. 

The letter calls for the following principles to guide the reform:

  • Build a future-proof economy with jobs for all – Allow fiscal flexibility to target a fully employed economy with decent and well-paid clean jobs available to all.
  • Fill the green funding gap and make Europe energy independent from fossil fuels – Targeted and scaled-up green public investment is needed to remain below the 1.5 Celsius goal of the Paris Climate Agreement. A reformed fiscal framework should ensure the alignment of Member States’ public spending with the Paris Climate Agreement, as well as other environmental objectives including reducing resource use and zero pollution.
  • Reinvest in public services and social protection – Social expenditure must guarantee universal access to quality basic public services, as well as a social safety net, so no one falls through the cracks and the care economy is central. 
  • Target human, economic and environmental well-being – Make durable well-being the primary objective of EU economic policy by establishing adequate indicators within the EU’s fiscal policy framework and making sure the rules do not translate again into austerity. Economic growth as a primary objective does not work and governments should rather aim to achieve improved human, economic and environmental outcomes. 

The converging crises require a complete rethink of the economy. Rather than optimising outputs, we need a wellbeing economy, allowing everyone to enjoy a warm home, good health and a habitable planet. This starts with a European fiscal framework that prioritises long-term environmental and social sustainability over short-term thinking.

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About Fiscal Matters

Fiscal Matters tries to reform Europe’s fiscal rules by organising and elevating the voice of civil society through common actions like letters, events and media interventions. Fiscal Matters brings together academics, civil society organisations, think thanks and trade unions,deeply concerned that the current fiscal framework prioritises debt reduction and balanced budgets over much more important human, economic and environmental outcomes – like creating well paid green jobs, lifting millions out of poverty, and implementing much needed green infrastructure projects. Accordingly, we work collaboratively to overhaul the current approach to fiscal policy and reshape our economies and tackle the unprecedented challenges facing the EU head on. Members include the European Trade Union Confederation, the European Environment Bureau, the European Youth Forum, Climate Action Network Europe, Finance Watch, New Economics Foundation, Greentervention, Sustainable Finance Lab, Réseau Action Climat France, ZOE Institute for Future-fit Economies, Social Platform.



Open letter: Support public investments for a stronger, more resilient and sustainable economy

We are deeply concerned about the return of overly restrictive fiscal policy. The final compromise on the reform of the EU economic governance due to be voted on by the European Parliament and the Council is multiplying unsubstantiated and arbitrary numerical benchmarks, which will trigger a wave of cuts to public budgets across Europe. Several countries, such as Germany, France and Denmark, have already cut or are planning to cut green investment and social spending for 2024 and 2025.

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