2023-05-14 03:09:54
Europe gets new fiscal rules. The idea is that Brussels will ask less rigidly for additional cuts if countries are already in trouble. A great improvement, according to experts, but it is not without dangers.
Since the introduction of the euro, member states have had to prove that their budget deficits are not excessive. It may not exceed 3 percent of GDP (gross domestic product: everything earned in a country). And the national debt must be less than 60 percent of GDP. This should prevent countries from becoming so deeply indebted that financial stability in the rest of Europe comes under pressure.
In theory, countries must comply with this, but since 2003 large countries such as Germany, France and Italy have been violating these standards. However, many countries have been striving for those standards for years. In 2013, for example, the Netherlands made significant cutbacks because of the Brussels standards. “They were too rigid and rigid,” says Harald Benink, Professor of Banking & Finance in Tilburg.
“The accounting approach of steering on those rules caused a double dip recession in the previous crisis (two periods of a shrinking economy in quick succession, ed.)”, says Bas Jacobs, professor of economics and public finance at VU University Amsterdam. “Countries then started to cut back considerably, which made the economic contraction even worse. Fortunately, we have learned from this and the fiscal rules have been temporarily suspended in the corona pandemic and energy crisis.”
Less rigid requirements for government debt and budget deficit
From 2024, new budget rules must be introduced. In April, the European Commission issued a memorandum for this proposal which is now being discussed in the European Parliament and in June by European finance ministers.
The idea is that the new fiscal rules will become less rigid. The provision that with a government debt of 140 percent of GDP (as Italy now has) you have to go back to 60 percent and realize one twentieth of this annually, will be deleted. This measure is very strong, especially with such high debts, and would require very high cuts. However, there will be a provision in which a budget deficit that is too high must be reduced by half a percent annually. “That is not impossible,” says Benink.
More room for customization
The new budget rules should offer more scope for customisation. Europe is asking countries with too high a budget deficit or too high a government debt to come up with an improvement plan to show improvement within four to seven years. Together with Brussels, it will then be examined whether recovery can be achieved in this way. “That is much more modern than demanding improvement from above and threatening with sanctions,” says Benink.
The limits of 3 percent deficit and 60 percent national debt remain in treaties. But it is managed in a different way. Furthermore, the new proposals understand temporary shortages due to high investments in competitiveness, digitization and climate measures.
You should not exacerbate a crisis by austerity
“The new proposals are less rigid, because they don’t just look at the one-year budget deficit. Or to the national debt of the past, but also to take a look at the future,” says Jacobs. “We learned from the great recession that you should not exacerbate a crisis with even more austerity measures.”
Jacobs sees that weaknesses in the old rules have been addressed. “But where the new rules are less rigid, they are also somewhat more vague. And that makes it more complicated to comply with them. Countries that need to improve their financial situation can only make nice promises. Which may not be fulfilled.”
Germany fears that rules are not strict enough
In earlier discussions about fiscal rules, Northern European countries such as the Netherlands, Germany and Finland, for example, usually showed their strict side. They wanted tight adherence to deficit and debt standards.
Germany in particular is now asserting itself. The German finance minister does not think the European proposals are strict enough. In an article submitted to the Financial Times he wrote that a high national debt should automatically decrease step by step.
“Germany fears that the national debt will be reduced too slowly,” says Benink. “But from a macroeconomic point of view, there is not much reason to rigorously aim for a national debt of 60 percent. Not many countries meet this requirement, even though the Dutch national debt is only 50 percent. per cent.”
Rewards work better than punishments
Benink thinks that there is a solution for proper compliance with the recovery plans. “If you present Europe with a carrot, for example money for climate investments, they also have an incentive to realize their plans. That works better than punishment.”
Benink cites the corona recovery fund of the European Union as an example. Member states only receive money if they also implement reforms. “You can take this much further through new European investment funds to be set up.” For example, they can only pay out when countries have their budgets and national debt in order.
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