EPC: Rethinking EU economic governance: The Stability and Growth Pact
25 November 2021
It is time to reimagine the EU’s economic governance. In early 2021, the EPC set out to do just that in its Rethinking EU Economic Governance Task Force.
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:
- Interpretative flexibility to smooth fiscal adjustment paths and potentially place less emphasis on problematic indicators.
- Moderate non-treaty reforms to reduce complexity and procyclicality and increase enforceability.
- The ‘golden rule’ to exempt some public investments from the fiscal rules.
- Central fiscal capacity for macroeconomic stabilisation.
- Off-balance-sheet investments to increase public investment.
The contents of the paper and views expressed are entirely the
work of the authors and should not be interpreted as representing the
views of any member of the Rethinking EU Economic Governance Task Force.
Papers on the European Semester and the Recovery and Resilience
Facility, social investment, and a final overview will follow this
publication. Read the full paper here.
EPC
© European Policy Centre EPC
