Subject: Open mail to the Members of the European Parliament on the reform of the Economic governance – Fiscal rules of the Stability Pact – Committee ECON 11^th December 2023

Reference (complete list of documents and links below):

• the regulation on the effective coordination of economic policies and multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97 (ex-1466), so called preventive arm,
• the regulation No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (ex-1467), so called corrective arm,
• and the Directive 2011/85/EU on requirements for budgetary frameworks of the Member States

Honorable Members of the European Parliament,

Highly concerned and counting on you, we are getting in touch today as the EU is close to its “moment of truth” regarding the reform of the European fiscal rules.

A bad compromise would be worse than taking time again to reflect on good reform principles.

The stakes are immense, since they concern the budgetary policies that can be adopted by your colleagues in the national parliaments for the next decade, decade that will be politically, socially and environmentally decisive. And there is unfortunately no prospect for an European central fiscal instrument that would alleviate the burden on national public finance.

We are extremely concerned about the content of the texts under discussion not only among the ministers in the Council, but also within the European Parliament. We point below on three major issues that we believe should be settled before agreeing on any reform of the European fiscal rules on the base of the present Commission’s proposal.

Originally, the method envisaged by the Commission for calibrating Member States’ budgetary strategies was a country-specific approach based on risk assessment while abandoning strict and uniform quantitative targets for debt and deficit reduction. Lessons had indeed been learnt from the years of austerity with well-known negative consequences on the well-being of people and public infrastructure. Lessons had also been learnt from the four years during which the rules had to be suspended because they were unsuited to manage the COVID-19 and energy crises.

The amendments to the Commission’s proposal currently under discussion in the Council and the draft Parliament’s report  would significantly depart from this approach. They would not give the national budgetary authorities the flexibility they need to react quickly to the shocks to which our economies will continue to be subjected. They won’t be able to integrate the challenges posed by climate change and the energy transition properly nor to pursue a credible path of sustained investment as needed to stabilize the expectations of the private sector.

We highlight three points that will determine the capacity of the reform to meet present and future challenges.

1.         “Safeguard clauses” introduced on a demand of Member states and escape clause

a.         Article 6, point (d) and 15.2 (f) of draft regulation ex-1466 and article 3.4 of draft regulation ex-1467: According to the current discussions in the Council and Parliament, these articles would impose a minimum and undifferentiated pace of reduction on the debt and deficit to countries whose deficit or debt ratios exceed the totemic reference values enshrined in the Treaty. If they were to remain in the final text of the regulations, such limits would be highly counter-productive. For sure, the Parliament’s report may look softer concerning the debt reduction path than what is being discussed among ministers. However, even a somewhat postponed quantified limit will have to be anticipated and may unnecessarily restrict margins for investments.

The door for imposing a priori a debt and deficit reduction should be kept strictly closed.

The former IMF chief economist, Olivier Blanchard, summed up the argument against a uniform approach anchored in a legislation perfectly (published on 6 November 2023).

« Turning to the European Union, and the current discussion of how to reform fiscal rules, … while the rules must enforce debt sustainability, any further requirement that the debt ratio actually decreases over some limited horizon is likely infeasible in a number of countries. If such a rule is introduced, it will either be breached, at the cost of credibility of the new rules, or lead to catastrophic economic and political outcomes, not to mention a likely squeeze on badly needed public green investment. »

b.         Article 25 of draft regulation ex-1466: As the text currently stands, the escape clause allowing a toping up of net public spending above the rule can only be invoked in the event of « exceptional circumstances ». It is necessary to add « cyclical variation » as triggering factor of the escape clause. Such variations are inherent to the economic system. It is not possible to rely solely on automatic stabilizers to return to the equilibrium because of hysteresis phenomena that are well documented in the economic literature.

2.         Method for analyzing debt sustainability

Article 8.3 of draft regulation ex-1466: The EPs draft report rightly wants that the regulation guides the method to be applied for future debt sustainability analysis (DSA). However, following elements are missing and should be considered in the DSA beyond traditional indicators:

a) the positive impact of mitigation and adaptation investment to take account of the cost of non-acting on climate;

b) fiscal multipliers to avoid self-defeating attempt of a budgetary consolidation depressing activities;

and c) the fact that any calculation of the output and labor potential is based on hypothesis in need to be unveiled and discussed as well as driven by political choices.

3.         Ensuring a sustained and credible path of investments in a just transition and enhancing the quality of public finance: a) Exempting some expenditures from the limit b) well-funded assessment of adequation of national policies with priority EU common objectives

1. Articles 2.1 (2) of draft regulation ex-1466:  Net expenditures are the key variable ruled by the regulations. Deducting from the expenditures those investments contributing to EU common objectives and/or reducing future risks and costs shall be possible. The deductible investments should be part of an established strategy targeting EU objectives and respecting European taxonomy, including the DNSH principle. No a priori cap shall be imposed as long as the debt sustainability is not endangered.An often-suggested by economists and by us preferred method is to include the eligible investments over their lifetime according to their amortization rate. Debt financing of net public investment would then be possible as economically desirable.    
2. Articles 3, 11, 12, 13 of draft regulation ex-1466: National fiscal policies importantly contribute to EU common objectives, notably climate, biodiversity and social rights ruled by different governance strands. The European Semester and the National fiscal structural plans should be an instrument to unveil complementarities and progress based on a reporting identifying relevant expenditures and revenues and relying on output, results and impact indicators.     

Let us conclude with a more general remark. Lately, the EP under the influence of its right-wing, has delivered few blows to the Green Deal and our ability to achieve the Fit for 55 roadmap. The four year crises behind us have aggravated social imbalances and the most recent Climate Action Progress Report concluded that given present policies the Union is not on track to meet its Green House Gas targets. We fear voting the compromise as it is now on the table, might be the fatal blow to a just transition towards a net zero economy.

If the above minimal conditions are not fulfilled there can be no coherence between the Stability Pact, the fulfilment of the European Pillar of Social Rights and the European Green Deal. National parliaments and governments would not be able to comply with European fiscal rules, tackle inequalities, make a success of the energy transition and adapt to climate change all together.

With our best regards

Michael Vincent                                              Ollivier Bodin

President Greentervention                              Senior economic advisor Greentervention

DOCUMENTATION

Proposal for a regulation of the European Parliament and of the Council on the effective coordination of economic policies and multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97 (ex-1466) – so called preventive arm

Regulation in force    

Commission’s proposal

Draft Parliament’s report on he Commission’s proposal

List of amendments proposed by parliamentarians 1

List of amendments proposed by parliamentarians 2

List of amendments proposed by parliamentarians 3

Proposal for a regulation amending the regulation No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (ex-1467) – so called corrective arm

Regulation in force

Commission’s amending proposal 

Draft Parliament’s report on the Commission’s proposal (not available on Friday 8^th December, 16 00)

List of amendments proposed by parliamentarians

Proposal for a Council directive amending Directive 2011/85/EU on requirements for budgetary frameworks of the Member States

Directive in force

Commission’s amending proposal 

Draft Parliament’s report on the Commission’s proposal (not available on Friday 8^th December, 16 00)

List of amendments proposed by parliamentarians