Seven EU economic governance reforms for a stronger, greener and more resilient Europe

Financing the transition

INVESTING IN OUR FUTURE: Seven EU economic governance reforms for a stronger, greener and more resilient Europe


Europe faces serious economic, environmental and social challenges that require reforms and investment. Europe is coping with multiple compounding crises, particularly the cost of living crisis, the aftermath of the Covid-19 pandemic, the Russian invasion of Ukraine, the climate crisis and biodiversity loss. At the same time, Europe must tackle additional long-term challenges around economic, energy and digital sovereignty, decaying infrastructure, quality of work, inequality and ageing populations. Tackling these challenges will require transformative legislative reforms. Evidence also points to the need for more and better public investment to catalyse significant amounts of private capital towards these socially desirable goals – as illustrated by existing funding gaps.

But actions remain constrained by the European economic governance framework. Fiscal rules that aim at ensuring debt sustainability are a legitimate feature of a monetary union without fiscal union. However, their focus on arbitrary debt and deficit limits incentivises undifferentiated reduction of public spending without sufficient regard for EU objectives, euro area (EA) needs and spending quality – with public investment as collateral damage. Moreover, their use of the debt-to-GDP ratio to gauge debt sustainability overlooks broader drivers of debt unsustainability. These rules also fail to adapt to the changing macroeconomic environment. The long-term solution should be to amend the EU Treaties, reforming arbitrary debt and deficit limits. In the meantime, the European economic governance framework requires fundamental upgrades to effectively ensure sustainable public finances that also support EU objectives – such as environmental protection, sustainable economic development and convergence.

We keenly observed and reflected upon many elements of the European Commission’s orientation paper, and view it as a good starting point for the review. Whilst the return to country-specific debt pathways is the rational and responsible course of action, we support the use of debt sustainability analyses (DSA) as a basis for country-specific reference paths built around expenditure paths – a welcome move away from the unreliable structural deficit rule. We welcome the proposed move towards national medium-term fiscal-structural plans connecting country-specific debt pathways and their duration, with commitments for reforms and investments that improve debt sustainability. We see the importance of establishing a common EU assessment framework aiming to ensure investments and reforms in national plans support debt sustainability, EU environmental, social and economic priorities and country-specific challenges.

But we need more to ensure that the EU economic governance supports, rather than undermines, the EU’s goals. Whilst improving the tax system has an important role to play in delivering sustainable public finances, the European economic governance review is an opportunity to embed powerful incentives for Member States to trigger the public investments and reforms needed to tackle today and tomorrow’s economic, social and environmental challenges while ensuring a just transition for all. Meanwhile, the Commission’s proposal is vague on mechanisms to ensure the quality of public finances and reforms. Furthermore, it maintains arbitrary limits to debt-financed quality investments which make little sense in the absence of debt sustainability risks. It’s particularly detrimental as Europe is facing serious challenges that call for an increase in quality investment and social support. We therefore put forward the following seven key demands:

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