The Member States of the European Union (EU) used budgetary expenditure to address the Covid19 health crisis and to mitigate the economic impact that ensued. But the European Union, as an institution, was activated with the creation of the development fund.
With the temporary release of the restrictive fiscal rules, known as the Maastricht rules, and with the help of the European Central Bank's quantitative easing program, which kept borrowing costs low, all countries were able to access, lend and finance markets. their needs.
But this can not last forever. Neither the Maastricht rules nor the public spending can be as high as they were in mid-2020, much longer. The European Commission has announced that we will return to these rules in early 2023.
Many now agree that while the logic of the existence of these rules still applies, the rules themselves have not served their purpose well. 2022, therefore, gives us a unique opportunity to redesign them before we need to implement them. And to be able to do that, we need to understand why they were inadequate and how the purpose of fiscal policy will change in the future, compared to the time these rules were designed in the early 1990s.
The rationale for imposing restrictive fiscal rules was to avoid bad fiscal behavior. While the use of fiscal policy by low-debt countries benefits all Member States, when over-indebted countries use it, and especially to an excessive degree, the viability of the euro is threatened. Thus, the rules were designed to prevent countries from overusing fiscal policy.
However, what has happened is that fiscal policy has been misused. In times of recession, where state assistance was needed, fiscal policy was tight. And at the same time, in times of prosperity, where security stocks need to be built, fiscal policy has been relaxed. This pre-cyclical nature of fiscal policy is the first thing any new rules must prevent.
At the same time, the most obvious victim of strict fiscal policy has been investment. When the economy is hit and spending is forced to shrink, it is difficult to cut costs such as social security or health and education. It is much easier to reduce public investment, the benefits of which are not visible for many years, a phenomenon known as the “tragedy of the horizons”. Thus, investment has suffered a major blow in the last 20 years, mainly in heavily indebted countries.
Therefore, new rules must ensure that security reserves increase in good times, without jeopardizing future prosperity by postponing investment.
Investment is a matter of strategic importance. To achieve our goals for climate and digital transition we will need large investments over the next 30 years. The state will play a key role in financing these transitions in order to attract the required private capital. The fiscal rules we may plan for next year should no doubt not restrict investment.
But we are not starting from scratch, as many countries have high debt levels. Even if future rules do not restrict investment, not all countries will be able to make them quickly and on the right scale. Delays and insufficient investment will be detrimental to the countries themselves, but will jeopardize the achievement of our collective ambitions on climate change.
This is where the Development Fund can help. Indeed, this problem is not visible for the next five years, as funds flow into countries destined for green and digital investment. The purpose and scope of this fund was precisely to allow a minimum level of investment that is in line with EU objectives, thus allowing national funds to deal with the pandemic.
But when these resources run out, national debt will be a deterrent. But both the need for investment and the protection of fiscal sustainability for all will remain.
The Development Fund offers a good model to ensure that our green and digital investments will proceed at a minimal rate, which will be high, but also achievable for everyone. Thus, it contributes to resolving the tragedy of the horizons at the national level. In addition, as it is organized at European level, it can reduce the incentives to classify all investments as green (even if they are not subject to restrictive rules), known as “environmental laundering”. Admittedly, the fund is now under test. However, a major first hurdle has passed: to be recognized as an appropriate means of risk-sharing when it comes to European public goods.
The new year offers us the opportunity to review not only the fiscal rules, but also the broader fiscal framework. We can do this without having to invent new tools or structures, but simply by applying already available ways to achieve our ambitions.
* Maria Demertzi is the Deputy Director of Bruegel, a research institute (think tank) based in Brussels. This text was published in English as an opinion column on the Bruegel Blog and the Blog of the Cyprus Economic Studies Society (cypruseconomicsociety.org)
