Last November, the European Commission presented an ambitious plan to overhaul the existing economic governance framework for the EU. The plan includes radical innovations both in the way in which national fiscal plans are formulated and in the governance structure that supports them (for other comments on the proposal, see for example Buti et al. 2022 and Wyplosz 2022).
The existing system of numerical rules is essentially scrapped. It is replaced by a system in which countries make medium-term plans that are assessed using debt sustainability analysis, and in which the single operational objective to achieve debt stability is the path of net primary expenditure (i.e. expenditure excluding interest and unemployment benefits). From the point of view of macroeconomic stabilisation, this is a welcome innovation. An approach based on medium-term plans and on an expenditure rule tends to deliver adjustment paths that are less sensitive to whether the economy is in a boom or a recession. The adjustment paths are also potentially more responsive to the quality of spending, as the proposal includes the possibility for member states to obtain longer adjustment periods if they make reform and investment plans conducive to long-term growth. In other words, the approach in the proposal leaves more room to tailor fiscal adjustment to the circumstances of a country, not only the in terms of its cyclical conditions, but also in terms of policy choices that affect future growth.
The Commission is clearly influenced in its thinking by the recent experience of the NextGenerationEU recovery plans, as a model of successful economic cooperation in the EU. This influence is visible in the design of the process that produces the four-year plans at the core of the new system. And it’s visible in the strong emphasis on investment and reforms.
It is useful to contrast the Stability and Growth Pact (SGP) with NextGenerationEU (NGEU) as different models of joint economic governance. The SGP essentially leaves all strategic economic choices to member states and only imposes on them a uniform set of rules, to ensure that these choices are consistent with a common objective of monetary/financial stability. NGEU, on the other hand, is strongly driven by the joint definition of common goals (green transition, digitalisation, reducing inequality), combined with considerable discretion in the formulation of national plans and in adapting them to the institutional reality of each member state. The models are also very different in terms of enforcement. The corrective arm of the SGP has mostly worked through moral suasion. Fines are in principle part of the enforcement mechanism but have never been applied. NGEU, on the other hand, has the advantage that non-compliance with the commitments made in the national plans can be simply punished by suspending financing...
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