“The EU budget rules must be reformed if we want to guarantee recovery.” This is the title of the joint letter published by the Financial Times, signed by the Prime Minister, Mario Draghi, and by the French President, Emmanuel Macron, to propose a joint strategy through which to reform the European Stability Pact.
The European Union has often been accused of doing too little and acting too late in dealing with crises. The collective response to the recession caused by Covid-19 was neither too little nor too late. Rather, it demonstrated the importance of acting in a timely and courageous manner. And it confirmed the advantages of coordination in policies between countries and institutions.
To combat the crisis, EU governments have provided nearly 1.8 trillion euros in aid to families and businesses. The European Central Bank has embarked on an extensive monetary stimulus program to support credit. The European Commission suspended its budget rules and, together with governments, launched the Next Generation EU program, a 750 billion euro plan to finance investments and reforms.
The recovery is well underway. The EU economy is not yet on the trajectory it had before the pandemic, but it is on track to return to pre-crisis levels in the coming months. Public finances are also in the process of consolidating: the debt-to-GDP ratio in EU countries has stabilized and is set to decline in 2022.
While uncertainties persist, we face the great long-term challenges we face. The climate and biodiversity crisis are getting worse. Geopolitical and military tensions are on the rise. Technology is increasingly central to our well-being, but at the same time it sharpens existing inequalities and creates new divisions. Demographic changes are profoundly changing the structure of our societies. On all these issues, the EU must act swiftly and courageously.
In Italy and France, we have already carried out ambitious reforms to protect citizens and help them realize their potential, and we have already achieved tangible results. Now we have to go further.
We need to accelerate the reform agenda and complement this transformation with large-scale investments in research, infrastructure, digitization and defense. We need an EU growth strategy for the next decade, and we need to be ready to implement it through joint investments, better rules and better coordination, not just during crises.
The ability to use fiscal policy to protect our citizens and transform our economies has been and still is a central element of this strategy. Together with the other EU Member States, once we have defined a set of common macroeconomic principles and objectives, we will then have to discuss how best to translate them into adequate fiscal policies.
Even before the pandemic, the EU’s fiscal rules had to be reformed. They are too dull and excessively complex. They have limited the scope of governments during crises and overloaded monetary policy with responsibility. They have not created the right incentives to prioritize forward-looking public spending and strengthen our sovereignty – for example, public investment.
We will need fiscal policies that are credible, transparent and capable of contributing to our collective ambition to have a stronger, more sustainable and fairer Europe. There is no doubt that we need to reduce our debt levels. But we cannot expect to do this through higher taxes or unsustainable cuts in social spending, nor can we stifle growth through impractical budget adjustments.
Rather, our strategy is to keep recurring public spending in check through sensible structural reforms. Just as we have not allowed the rules to hinder our response to the pandemic, so they must not prevent us from making all the necessary investments.
The European Commission has launched a consultation on the future of EU fiscal rules and interesting proposals have been made. We need more room for maneuver and sufficient spending margins to prepare for the future and to ensure our full sovereignty. The debt to finance such investments, which will certainly benefit future generations and long-term growth, will need to be favored by fiscal rules, as this type of public spending contributes to the long-term sustainability of debt.
The Next Generation EU program has been a success – for the mechanisms it has introduced for assessing the quality of public spending and for how it is financed. As such, it offers a useful model for the future. The new proposals will deserve an in-depth discussion, not clouded by ideologies, with the aim of best serving the interests of the EU as a whole.
The upcoming French presidency of the Council of the EU will aim to develop a shared and comprehensive strategy for the future of the Union.
The EU must revive the spirit that guided its actions at the start of the pandemic in 2020. A new growth strategy and, subsequently, a strengthened fiscal policy that goes in the direction indicated here can make a decisive contribution to why the EU has the tools to realize his ambitions.