20 September 2023

ECB's Panettta: Investing in tomorrow: Future-proofing fiscal policies and governance in Europe

To ensure this reform is successful and that it strengthens our economic governance, the new framework will have to protect us from the mistakes of the past. And it will need to make it possible to use again policies that have proven to be effective.

Our fiscal framework is at a crossroads.^[1] Negotiations on the European Commission’s legislative proposals for reform of the EU’s economic governance rules are entering a crucial phase.

To ensure this reform is successful and that it strengthens our economic governance, the new framework will have to protect us from the mistakes of the past. And it will need to make it possible to use again policies that have proven to be effective.

Before the pandemic, we had accumulated a significant public investment gap that had undermined our economic potential.^[2] Fiscal policy had often been procyclical. And macroeconomic policies had at times worked against each other. We have paid a high price for this in the form of weaker growth, higher unemployment and deteriorating fiscal conditions.

But the response to the pandemic was different. National fiscal policies responded countercyclically to the downturn, complemented by a European stimulus plan which focused on investments in the green transition and digitalisation. This fiscal response worked in tandem with monetary policy and supervisory measures, mitigating financial amplification effects and pulling the economy out of the liquidity trap.^[3] The result has been an almost full recovery (Chart 1), record-low unemployment and the return of debt to a downwards path after the initial increase recorded in 2020.

More recently, fiscal policy has complemented monetary policy to counter the inflationary effects of Russia’s war against Ukraine and the energy crisis.

Today I will argue that we need to embed the lessons learned from this experience in our fiscal governance...

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