Despite being a central pillar of EU economic policy, the bloc’s fiscal rules have grown “more complicated and difficult to understand”, been breached frequently and have failed to prevent the emergence of sovereign crises, economic think tank Tasc noted in a report published this week.
The legally binding rules, which date back to the Maastricht Treaty in the early 1990s, compel EU states to keep their public deficit and debt-to-gross domestic product ratios within certain thresholds. They have been suspended since the outbreak of the pandemic in March 2020 but EU finance ministers are agreeing a reformed set of rules to be agreed and adopted this year, ones that will presumably aim to be less contentious than their predecessors.
As Tasc sees it, the new rules must ensure the financial sustainability while facilitating “Europe’s public investment challenges in the coming years, especially in relation to climate change”.
Europe’s member states require major increases in public and private investment, particularly to meet emissions targets, it says, noting “the fiscal rules in their current form cannot meet those challenges”.
The think tank welcomes that “unobservable and poorly measured indicators, such as structural deficits and output, have very much been relegated to the background”. It also praises moves to tailor debt reduction more to individual contexts while making greater allowances for green and other types of public investment.
However, it bemoans the fact that the original targets of a debt-to-GDP ratio of no more than 60 per cent and a deficit no greater than 3 per cent are likely to remain, suggesting “these values were arbitrarily chosen based on conditions that prevailed in the 1980s”.
It argues that these measures are of limited use and “the most sensible reform of the fiscal rules would focus on the debt-servicing burden as the key indicator”.
In the same breath, it notes that such an overhaul is unlikely to be realised. “We therefore suggest a number of less ambitious recommendations, which would be welcome, although not ideal,” it says.
Chief among these is raising the public debt target from 60 per cent to 100 per cent, a suggestion that must have had Ireland in mind. Ireland’s debt-to GDP ratio is less than 60 per cent despite the State’s public debt fast approaching €250 billion. This is because GDP is exaggerated by the actions of multinationals.