The EU begins to grasp its fiscal nettle

It’s finally moving again. The effort to reform the EU’s ill-fitting budget rules took a new step when the European Commission published its ideas for changes on Wednesday. The overall direction is to recognise the undeniable: that the rules need to be simpler, more flexible, tied to more credible incentives and sanctions, and promote rather than frustrate shared policy objectives such as greater investment. All this expresses the shift in thinking already under way in national capitals.

In brief, Brussels wants to maintain the Treaty-based references to deficit and debt limits of 3 and 60 per cent of gross domestic product, but negotiate individual multiyear budget plans, stretching out for four years, or as much as seven when combined with agreed investments and reforms. Instead of rigid fixed (and counterproductively large) reductions in debt-to-GDP ratios, the new rules would simply require countries to get on a credible path for public finances within that horizon. And that individualised path would be defined by a single operational target: a government’s annual net public expenditure from year to year.

You can read the detailed document here — but the details will undoubtedly be the subject of difficult political discussion. What matters most, I think, are not the specifics, but the attempt to shift away from the dumb “computer says no” functioning of the rules, as well as from the ever-increasing complexity that was the result of trying to improve them like some obsolete computer code weighed down by having patches added whenever it doesn’t work well. It is the shift to individually negotiated multiyear plans, to be proposed by the countries themselves, that could make the biggest political and economic difference. In Philippa Sigl-Glöckner’s assessment, it would make the commission into “Europe’s quasi-IMF”.

There are obvious analogies with the National Recovery and Resilience Plans, the investment plans paid by common EU funds set up in the pandemic. They, too, involve policy plans proposed and “owned” by national governments, though negotiated with the commission and vetted by member state peers, and liable to sanctions if agreed milestones are not reached. Nevertheless, the commission has been at pains to communicate that if they have taken inspiration from the RRPs, they are far from copying the process.

The less obvious and, to me, more interesting echoes are from the past. Striking individual deals with countries that commit to specific reforms in return for financial leeway harks back to how then-chancellor Angela Merkel aired the idea of cash-for-reform “contracts” during the eurozone debt crisis.

But there is little reason to expect Germany to embrace this reform. Not, perhaps, because it cannot tolerate the idea of individually tailored debt reduction plans (though Berlin expressed unhappiness about just that in this summer’s position paper). Rather because it doesn’t trust the commission to be tough enough in its demands, let alone share Berlin’s economic philosophy about what generates growth.

At the same time, the new proposal also harks back to something superficially quite contrary to German views: the old French idea of “economic government”. Look at how Brussels’ proposal would work in practice: it would require governments to comply not just with quantitative budget targets, but to explain how their policies would secure sustainable public finances, and be allowed greater budgetary leeway by demonstrating investments and reforms that contribute to common EU priorities. What those priorities will be — and who gets to determine them — will have a more substantive influence on national policy choices than ever before.

It seems to me that three things will flow from this.

First, while there will still be rules, there will also be much more politics around what the rules concretely demand. That would be a break with the EU’s tendency to crowd out the mess of politics by codifying as much as possible. As Sigl-Glöckner highlights, there would be a lot of difficult and contested policy judgments to make that are not technocratic but deeply political. This is not a bad thing. Reopening a space for truly European political decision-making would, as I have argued before, be a healthy development. But it may also be the feature of the new proposals that goes most against Berlin’s traditional sensibilities. Expect attempts to close down that space as much as possible as the fiscal reforms take shape.

Second, the state is back. Not that it was ever gone in Europe. But the demand for four- to seven-year plans, not just for aggregate fiscal quantities but for the purposes on which money is spent, forces more of politicians’ attention to the state’s role in shaping the long-term direction of the economy. That is in line with the global trend I have written about before.

Third, these two things together open up the exciting possibility that economic policy will more than ever before be run to achieve common pan-EU goals. The medium-term budget plans will be guided by notions of European common interests that will be politically fiercely contested in the EU’s ministerial councils. That by itself will make whatever comes out of those contests more salient. And if nations making their four- to seven-year plans are aware of other countries doing the same, there is at least the prospect of some co-ordination. It is easier for a group of countries to all upgrade their power grids and build interconnectors, for example, than for a single country to plan this on its own. The treaty injunction to regard economic policies “as a matter of common concern” could potentially take on a much more substantive sense.

I’m certainly not saying that the proposed new fiscal rules are going to produce this outcome. But I don’t see how it could ever be achieved without something like them.

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