Mario Draghi and Emmanuel Macron: The EU’s fiscal rules must be reformed
The writers are prime minister of Italy and president of France
The EU has often been accused of doing too little, too late in a crisis. However, our collective response to the economic impact of the Covid-19 pandemic was neither too little nor too late. Rather, it demonstrated the power of bold action taken early. And it confirmed the benefits of policy co-ordination, across countries and institutions.
To fight the crisis, EU governments have spent nearly €1.8tn to help families and businesses. The European Central Bank has unleashed a sizeable monetary stimulus to support lending. And the European Commission has suspended its fiscal rules and, together with governments, launched the Next Generation EU programme, a €750bn plan to fund investment and reforms.
The recovery is well on its way. The EU economy has not yet returned to its pre-pandemic path, but it is on course to return to its pre-crisis level in the coming months. Public finances are also on the mend: the ratios between sovereign debt and gross domestic product across the EU have stabilised and are set to fall in 2022.
Despite the remaining uncertainties, we must look forward and address the significant long-term challenges we face. The climate and biodiversity crises are worsening, while geopolitical and military tensions are rising. Technology has become ever more central to our wellbeing, while at the same time exacerbating existing inequalities and creating new divides. Demographic evolutions are profoundly changing the structure of our societies. In all these areas, the EU must act boldly and quickly.
In Italy and France, we have already pursued ambitious reforms to protect our citizens and help them fulfil their potential, and we have already achieved tangible results. We must now go further.
We must deepen the reform agenda and accompany these transformations with large-scale investment in research, infrastructure, digitisation and defence. We need an EU growth strategy for the next decade, and we must stand ready to implement it through common investments, more suitable rules and better co-ordination — not only during crises.
The ability to deploy fiscal policy to protect our people and transform our economies has been, and remains, central to this strategy. Thus, together with all other EU member states, once we have defined a set of common principles and macroeconomic goals, we will then have to discuss the right way to translate these objectives into a sensible new fiscal framework.
Prior to the pandemic, the EU’s existing fiscal rules were already in need of reform. They are too obscure and excessively complex. They constrained the actions of governments during crises and overburdened monetary policy. They also failed to provide incentives for prioritising key public spending for the future and for our sovereignty, including public investment.
We will need a framework that is credible, transparent and capable of contributing to our collective ambition for a stronger, more sustainable and fairer Europe. There is no doubt that we must bring down our levels of indebtedness. But we cannot expect to do this through higher taxes or unsustainable cuts in social spending, nor can we choke off growth through unviable fiscal adjustment.
Instead, our strategy is to curb recurrent public spending through sensible structural reforms. And, just as the rules could not be allowed to stand in the way of our response to the pandemic, so they should not prevent us from making all necessary investments.
The European Commission has launched a consultation on the future of the EU’s fiscal rules, and interesting proposals are being put forward. We need to have more room for manoeuvre and enough key spending for the future and to ensure our sovereignty. Debt raised to finance such investments, which undeniably benefit the welfare of future generations and long-term growth, should be favoured by the fiscal rules, given that public spending of this sort actually contributes to debt sustainability over the long run.
The Next Generation EU programme has been a success — in its assessment of public spending quality and in its mode of financing. As such, it offers a useful blueprint for the way forward. New proposals will deserve in-depth discussion, not clouded by ideology, with the aim of better serving the interests of the EU as a whole.
The upcoming French presidency of the Council of the EU will have the objective of developing a shared comprehensive strategy for the future of the union.
The EU must rekindle the spirit that drove the action it took at the start of the pandemic in 2020. A new growth strategy and, then, an enhanced fiscal framework along these lines would go a long way to ensuring that the EU has the means to realise its ambitions.