Narcissism of small differences delays accord on EU fiscal rules

“Member States shall regard their economic policies as a matter of common concern.” From this obligation, which European Union countries are treaty-bound to honour, flows the extraordinary fact that Europe’s sovereign governments regularly hold each other to account for their budgets. Anywhere else, that would be a supremely national matter.

We are now in the endgame of an overdue update of the union’s fiscal rules, which were suspended during the pandemic. Talks have been intense since even before Brussels published a legislative proposal last spring.

The Spanish government is keen to seal an agreement during its current six-month EU presidency. All the signs are that most member states agree it’s necessary to wrap things up soon, not least because if they do not, then the old rules kick back in.

The reforms being discussed are better than what they replace – simpler and more countercyclical, tying budget plans to spending paths anchored to long-term public debt projections.

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Those paths will be country-specific and partly shaped by national governments. The changes hope to make the strictures more realistic, economically and politically (the previous rules were often honoured in the breach).

They provide more room for growth-promoting policies, offering budgetary flexibility in return for agreed investments and reforms.

But the new rules will also carry over some problems of the previous regime, and may add new ones. “Common concern” will still focus on the quantity more than the quality of spending by member states. Arithmetic will still dominate politics.

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Previously, budgets could be sanctioned on the basis of opaque calculations of structural deficits. The new rules will use debt sustainability analyses just as opaque, sensitive to assumptions and hard to explain to voters.

The system will ensure that national policy remains the main bone of contention. That all but guarantees it will absorb the political attention badly needed for securing the provision of common European public goods instead – that is to say, investment with cross-border benefits.

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That would be truer to the “common concern” commitment than mere reciprocal monitoring of national finances. It would also be more productive now that integrating Europe’s energy networks and collectively digitising and decarbonising are the accepted priorities of the day.

Moreover, the political economy around common borrowing and spending is likely to worsen. The faultlines are obvious. Net recipient economies see the EU’s groundbreaking post-pandemic recovery fund as something to build on.

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Net contributors are adamant it should be a one-off. If the new rules make allowances for spending funded by EU funds, as would be logical, this division will deepen: more common spending means not just larger transfers but softer budget discipline.

Still, the new regime will improve on the old, and the flaws are not in any case why finance ministers continue to squabble.

The main thrust of the new rules has been accepted by everyone. A Danish compromise proposal has bridged much of the gap between those, such as Germany, who call for year-by-year reductions in debt, and those, such as France, who insist there could be no automatic yearly cuts regardless of the economic cycle or other economic circumstances.

Debt reductions averaged over a period of years seems the way out – but the exact rates, how to enforce them, allowance for investment spending and how to assess deficits separately from debt are all still contested.

What this amounts to, however, is that agreement is being held hostage by a narcissism of small differences. And the victims are EU economies.

Time, political energy and trust are all being expended at high rates by finance ministers with much more important tasks demanding their attention than a little stronger enforcement or a little more flexibility in the budget rules.

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This includes rethinking what the EU budget is for in a world of external geoeconomic and geopolitical threats, an urgent energy transition and enlargement coming faster than many think.

How it accommodates the need for more common investments – in defence, transport and energy links, to mention just a few – with the absorption of new, poorer but sizeable populations will matter a lot more to Europeans’ economic future than remaining tweaks to the fiscal rules.

So does progress – so far disastrously slow – on unifying and growing the bloc’s capital markets. European IT and green tech entrepreneurs need funding to grow big at home rather than sell up in the US.

The details of fiscal rules should be no hill to die on, no matter the domestic politics of claiming victory in Brussels. It is time to settle and start work on bigger things. – Copyright The Financial Times Limited 2023