Europe's policymaking class is readying itself for a clash that may last for a long time.
The European Union's rules governing debt and deficits are being reexamined because of the huge public-borrowing binge needed to fund spending during the Covid-19 crisis.
The EU has strictures on economies that were pre-pandemic. They face resistance from leaders of northern countries who pride themselves on being fiscally responsible. The Stability and Growth Pact is contained in a treaty, so any amendments would have to be approved by 27 legislatures.
The French President and the Italian Prime Minister held a news conference in Rome.
With the European Central Bank having just completed a contentious revamping of monetary policy, the outcome of this next battle will define the scope of fiscal action for the coming decade, and perhaps the EU's growth prospects as well.
Mario Monti, a former EU commissioner, believes that there should never be a return to rules in southern Europe. Monti believes that structural reforms should take precedence over high government deficits.
The Stability and Growth Pact was forged at the dawn of the euro at the insistence of the Germans, who wanted a means to enforce spending restraint on their more profligate neighbors to the south. It caps the deficits at 3% of GDP and the debt at 60% of GDP. The violators are fined.
The EU's fiscal rules were suspended due to the swine flu and may never be fully reinstated.
The European Commission autumn forecast has data.
The rules were created during a time when governments were not able to borrow at historically low interest rates, which is why economists now describe the pact as an unnecessary straitjacket. The European Commission activated an escape clause in the agreement that freed countries to spend extraordinary sums to salve the human and economic pain of Covid. When the suspension ends in 2023, nations must agree on what will happen.
The so-called frugals only want limited changes to the rules. The view is that the central bank support has made governments overly dependent on it.
The University of Groningen professor who was an adviser to the first president of the European Central Bank says that fiscal policy needs to be consolidated to relieve the burden on the central bank. He wants to return to the 3% deficit rule.
The Italians and the French, along with Spain and others, argue that the pact contributes to making debt loads unsustainable by acting as a brake on economic growth. It was too strict for Germany in its early years.
The International Monetary Fund issued a mea culpa after it became clear that stringent austerity measures imposed as a condition for debt relief had worsened the country's plight. Bruno Le Maire, the French finance minister, said on Dec. 14 that it is investment that will favor growth and debt reduction.
The Albert-Ludwigs-University of Freiburg professor of economic policy, who used to be a member of Germany's panel of economic experts, says such ideas have gone too far. It is the same old line. He says he can't hear it anymore. I don't think the German government should ask what is being done to reduce the debt burden, I think it should ask what is being done to reduce the debt burden.
Christian Lindner is Germany's new finance minister. He told Le Maire that he sees both sides.
During his tenure as the president of the European Central Bank, Mario Draghi has defended the euro and said the rules of the current pact areobsolete. He and Macron signed a treaty that promised more cooperation in a number of areas.
His disdain is reflected in his government's proposed budget for the next two decades. The EU Commission called for caution after this, because they found favor north of the Alps. The former member of the ECB's Executive Board says that it was right to react quickly in the Pandemic. We need to bring spending back to normal levels.
The European Stability Mechanism, the euro area's crisis lender, suggested in a paper published in October that governments consider a higher debt ceiling of 100% of GDP, which is the limit that has been surpassed by all the major economies.
The European Fiscal Board, a panel of EU advisers, advocates allowing for a slower pace of debt reduction while recognizing the need for clear and recognizable numerical goal posts such as the 3% budget deficit rule. A clause that would allow for green investment is one of the ideas under discussion.
The discussions will be lengthy. France, which is about to assume the rotating presidency of the EU, is planning a summit in March, and the commission is preparing to buy time by proposing interim fiscal targets.
The criteria were hard to apply before. Paolo Gentiloni, the EU commissioner for the economy and financial affairs, spoke at the conference. We will discuss it a lot in the coming months, but ignoring the issue would be a grave mistake.
