Upcoming Reform of the Stability and Growth Pact — FiscalMatters’ recommendations
The European Union will revisit the Stability and Growth Pact (SGP), an essential element of fiscal protocol for the EU Member States, beginning in March 2023. European Union fiscal rules date back to the 1992 Maastricht Treaty, which established rules on debts and deficits. As a secondary legislation, the Stability and Growth Pact was decided upon in 1997 and has been used as a tool to ensure EU Member States continue complying to prudent fiscal rules after passing the Maastricht criteria. The Stability and Growth Pact has been amended a few times since its initial passing, and in 2020 due to the unprecedented global circumstances the General Escape Clause was adopted to put a pause on regularly enforced rules on debts and deficits. The Escape Clause is to be lifted in January 2024, and in the meantime the European Commission has to decide what fiscal rules the union will return to. FiscalMatters has published seven demands for the European Commission to prioritize when drafting the reforms.
Under the Stability and Growth Pact, all twenty-seven Member States of the EU are subject to fiscal monitoring by both the European Commission and the Council of the European Union. States are to enforce fiscal policies to control the level of government deficit, to be 3% of the state’s GDP, and debt, to be 60% of GDP. To guarantee this the SGP has two regulatory arms: the first to monitor the budgets and economic policies of Member States (the ‘preventive arm’), and the second to improve the application of the Excessive Deficit Procedure (the ‘dissuasive arm’). Likewise, countries must provide plans for how they will reach their Mid-Term budgetary Objectives (MTO’s), which are their personalized, averaged limits for deficits. If a country violates the SGP’s requirements, the EU surveillance will increase through the Excessive Deficit Procedure, and if not corrected economic sanctions could be implemented. These rules, however, have been on hold since the General Escape Clause was adopted in 2020 to safeguard European economies from a pandemic-induced depression. As a result, European leaders have been able to cushion the pain from the COVID-19 economic crisis by increasing government spending, and thus enlarging their government debts and deficits well past the SGP guidelines.
Rather than force Member States to impose brutal budget cuts that could induce recessions on their own to comply with the SGP again, the European Commission is scheduled to meet in March 2023 to reform the debt and deficit limits, and to consider debt-reduction plans. If the European Union cannot come to an agreement on a reformed SGP, the outdated rules will remain, and many European nations will be forced to enter austerity. The summit of the European Council is scheduled to take place at the end of March, then the Commission is to publish their legislative proposal in April, followed by months of discussions and negotiations to conclude before January 2024 when the Escape Clause will expire.
FiscalMatters, a coalition of the European Trade Union Confederation, the European Environmental Bureau, the European Youth Forum, Climate Action Network Europe, Finance Watch, New Economics Foundation, Greentervention, Sustainable Finance Lab, and Social Platform published in February 2023 a proposed seven demands for the European Commission to keep in mind when approaching SGP reform. In general, FiscalMatters has the mission of encouraging the European Union to prioritize the green and just economic transition in investment and budget matters. The coalition proposed to the Commission the emphasis of considering these in reforming the Stability and Growth Pact:
- Quality plans for fiscal structures
- Spending for future generations
- Improving debt sustainability
- Coordinating successes of the European Semester
- Monitoring risks via the Macroeconomic Imbalance Procedure
- Increasing national and democratic ownership
- Strengthening European fiscal capacities
With these in mind, the Commission would update the SGP to accommodate the society we live in now and prepare it for the success of the generations to follow.
To fully grasp the significance of reforming the Stability and Growth Pact, it is important to understand the purposes of fiscal policy and the influence governments can have over the economy. Governments have two policies they can pursue to play a role in the economy: fiscal and monetary policy. The former refers to how a government borrows, spends, and collects money, whereas the latter deals with how a central bank manipulates the money supply via interest rates. These combined determine how a government delegates funds to manage welfare, inflation, unemployment, public services, healthcare, climate action, inequalities, pensions, education, and research. In the European Union, a vast majority of government spending goes to initiatives for social protection, health, and general public services.
How governments enact their tools of fiscal and monetary policy correlate with where the economy is in the business cycle; economies constantly fluctuate from being in expansionary periods and recessionary periods. In an oversimplified sense, the health of an economy comes from the status of the elements that make up the Gross Domestic Product of a nation: consumption, investment, government spending, and net exports. Disregarding net exports, governments use government spending (via fiscal policy) to balance out consumption and investment patterns. In Keynesian economics, a government is to increase spending (or net exports) to make up for the decreases in consumption and investment in a recession, and vice versa in an expansionary period. When pushing an expansionary policy agenda to boost the economy out of a recession, governments may spend more than they receive in revenue (taxes), which incurs public debts and deficits, or also lower taxes. This is what economies in Europe and elsewhere in the world have been doing to avoid a painfully drastic economic recession from the COVID-19 crisis. Such instances can lead to speculative attacks that create situations like those experiences by Greece, Spain, and Portugal in the 2010s. For this reason, the debts and deficits of a nation must be monitored to prevent constant government spending to postpone recessionary periods.