EU starts debate on budget rules

The European Commission opened a debate on how to reform the European Union’s fiscal rules. So that they can deal with a pandemic-induced surge in public debt and with the huge investment needed to fight climate change. European Economic Commissioner Paolo Gentiloni said that they are re-launching this review of their economic governance against a backdrop of enormous investment needs. This is because of the climate emergency. It became more acute with every year.

He also added that at the same time, the powerful fiscal support provided during the pandemic has led to higher debt levels. These challenges make it all the more essential to have a transparent and effective fiscal framework. The debate is to produce a fourth reform of the rules. The so-called Stability and Growth Pact is now so complex for understanding. High public debt is the main headache now. Annual debt reductions required by the current rules are simply not realistic for countries with debts of 160% of GDP. But many EU finance ministers see the debt reduction requirements strictly. This is for making sure that the rules do not tie governments’ hands at a time when the 27-nation EU needs to mobilise hundreds of billions of euros to bring net CO2 emissions to zero by 2050.

The Bruegel think-tank analysts for EU finance ministers showed additional public investment to meet the EU’s climate goals will have to be 0.5%-1.0% of GDP annually in this decade. The idea has the general backing of Spain, Italy, France and others. The Commission said that after gathering all the views on what should be done, it would provide guidance for fiscal policy.