25 November 2021

EPC: Rethinking EU economic governance: The Stability and Growth Pact

 Drawing on insights from participating experts, academics and policymakers, this first Policy Brief in a series of EPC publications outlines how the debate on the Stability and Growth Pact (SGP), the EU’s framework for fiscal and macroeconomic surveillance, has evolved and the reform options that have surfaced.

There is broad dissatisfaction with the SGP and how it has fared in an environment of prolonged low-interest rates, missed inflation targets and low growth. In February 2020, the European Commission launched a review of the SGP in an attempt to address its shortcomings, but it was quickly put on hold by COVID-19, when the fiscal rules were suspended. Half a year later, the Commission is finishing what it started.

We are in a drastically different world since the European Commission launched the review. Not only has government debt increased significantly, but regional, economic and social divides have worsened, policymakers face inflationary pressures for the first time in decades, and the Recovery and Resilience Facility and accompanying EU-level bond issuance fundamentally changed the EU’s economic architecture. In parallel, there is a widespread acknowledgement that averting, as well as adapting to, the climate crisis requires a steep increase in public investment.

Thanks to the EPC Task Force’s ongoing work, Francesco De Angelis and Frederico Mollet can pinpoint the SGP’s major flaws, post-COVID-19 challenges, and five broad categories of reform options:

1. Interpretative flexibility to smooth fiscal adjustment paths and potentially place less emphasis on problematic indicators.
2. Moderate non-treaty reforms to reduce complexity and procyclicality and increase enforceability.
3. The ‘golden rule’ to exempt some public investments from the fiscal rules.
4. Central fiscal capacity for macroeconomic stabilisation.
5. Off-balance-sheet investments to increase public investment.

EPC

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