Mujtaba Rahman is the Europe Practice Leader for Eurasia Group and the author of POLITICO’s Beyond the Bubble column. He tweets at @Mij_Europe.
There is no doubt that 2022 will be a very important year in the European Union’s economic debate, a year brimming with potential and possibilities, especially when it comes to the bloc’s ability to spend.
The suspended EU fiscal rulebook, the Stability and Growth Pact, is due to come back into force next year, but its rules are being revised to make them better suited to post-pandemic realities and future challenges. of the EU. And while some members would like to go back to the old rules, with just a few tweaks here and there, the political stars in Europe could line up in such a way that it might make bolder reform possible, if not in the short term, perhaps the longer term.
For starters, French President Emmanuel Macron has decided to make the EU a centerpiece of his re-election campaign. Aimed largely to highlight the difference between his more thoughtful ideas about Europe, as opposed to the more superficial ones of his most serious competitor, Valérie Pécresse, it also means he will push for reform under the French Presidency of the Council of the EU during the first six months of this year.
Elsewhere in Europe, the new Dutch finance minister, Sigrid Kaag, hails from the pro-EU D66 party, which will at least change the tone of the Dutch government on tax issues. It is also becoming increasingly clear that the team around new German Chancellor Olaf Scholz is likely to wield more influence than Christian Lindner of the Liberal Democratic Party in the Finance Ministry. The likely retention of Mario Draghi as Italian Prime Minister will provide another important voice in this debate — like his recent opinion piece with Macron demonstrates this.
Aside from the fertile ground laid by top EU leaders, the bloc’s economic context has also created more political space for fiscal reform: many EU capitals are now wondering how they can achieve their ‘net zero’ carbon emissions targets with no fiscal room to manoeuvre. . And several leaders were quite candid about the EU’s lack of instruments to manage soaring energy prices, with several pushing for more fiscal transfers at their December summit.
European Commissioner Paolo Gentiloni, the architect of the reform of European budgetary rules, wants to reach a broad consensus with the political support of European leaders. But this will take time. A first discussion between leaders will probably take place during an additional European Council convened by Macron on March 10 and 11. The Commission is then likely to offer guidance in mid-April, providing clues as to the direction the new rules are taking. He will then table his final proposal until June, hoping to secure approval from leaders at their June 23-24 European Council, although real legislative proposals are unlikely before the end of the year. .
Senior EU officials believe this two-step process will provide a useful intermediate step in the negotiations, providing clarity to EU capitals in April on their budgets for 2023, while also serving as a sounding board for new rules which the Commission hopes to formalize in June.
The redesign will be evolutionary rather than revolutionary at best, but its impact should not be underestimated. Although the limits enshrined in treaties – countries are not supposed to run budget deficits above 3% of GDP or accumulate debts above 60% of GDP – cannot be touched, there is much that can be done to facilitate expenses.
The most likely changes remain more lenient allocations for countries that are deleveraging, as well as more exceptions for public spending – in areas like green infrastructure or digitalization – that would not be taken into account within the limits of the deficit. It is also possible that the so-called opening and closing base Excessive deficit procedures (EDP) will be modified.
There are, however, a few things that could still throw a wrench in these developments.
Upcoming elections in Italy and France will be key to how this budget debate evolves – although a surprise outcome in either country looks increasingly unlikely. If Draghi were to become president, it could destabilize the Italian government coalition, and even lead to an early election that the far right would then be well placed to win. It is for this very reason that a majority of MPs are likely to choose to keep Draghi where he is – at least until his term ends in 2023.
France’s election could, in theory, upend the country’s post-war consensus and destabilize the EU, but Macron’s re-election also remains the most likely. And if he were to fall, his replacement would almost certainly be Pécresse, who would generally keep the same course on the EU, foreign affairs and internal reforms.
Longer term, Gentiloni favors a permanent EU recovery fund or fiscal capacity, alongside Macron and Draghi, but that debate is still premature. The NextGenerationEU recovery fund is only expected to distribute its first disbursements based on the effective implementation of the reform this year. Pushing for a permanent fund under these circumstances would likely make fiscally conservative northern European countries worse off.
Yet when it comes to European fiscal policy, the terrain is certainly changing. Barring an unexpected political earthquake, we can expect a productive year to reform Europe’s outdated fiscal institutions.