It is urgent to review the Stability and Growth Pact

Forecasts point to a faster economic recovery than initially expected. However, both the different variants of COVID-19 as well as the lack of vaccines and their unequal distribution in the world mean that uncertainties about the future remain.

The position of the European institutions not to withdraw the recovery stimulus prematurely must be maintained. Likewise, the interaction between monetary and fiscal policies has proven to be effective, and therefore needs to continue as well. The recent announcement of the ECB’s strategic review reinforces this position, which extends to both sides of the Atlantic: this was stated by the United States Secretary of the Treasury, Janet Yellen, before the Eurogroup.

In addition, the suspension of fiscal rules through the activation of the general safeguard clause of the Stability and Growth Pact (SGP) is expected to last until the end of 2022. This context of suspension until 2023 presents a window of opportunity to undertake a review of the rules of economic governance in the EU.

In a report led by the social democratic group and supported by a large majority of the chamber in the last plenary session, the European Parliament called for the revision of the macroeconomic legislative framework before the deactivation of the general safeguard clause. The PEC review cannot be postponed any longer. Carrying out this review after deactivation of the clause would lead to complications and divisions, and the risk of premature consolidation would slow down the economic recovery.

The PEC cannot be, as it was in the decade before the outbreak of the pandemic, an obstacle to economic growth. Productivity levels in the EU are low and growth is uneven across Member States. In this context, growth should not be conceived only as a creation of wealth and capital, but should also be a tool to combat inequalities, increase people’s well-being and promote compliance with the commitments of the European Green Deal, the Agreements of Paris or the European Pillar of Social Rights.

For this to be possible, we need a new way of approaching public investment. In the last financial crisis, the focus was on reducing the deficit and public debt. This meant that debt and deficit rules became targets rather than instruments, but they turned out to be ineffective, complex and outdated. Public investment, and consequently people, were the first victims of fiscal consolidation. Consistency with political commitments requires adequate budgetary capacity. Quality investment translates into quality public finances, which, in turn, improves long-term debt sustainability and increases the potential growth of economies. Consequently, Parliament considers that expenditure considered sustainable should receive special treatment in the calculation of budgetary rules.

A revised SGP requires a new conception of sovereign debt. Rather than focus solely on debt ratios, we must ensure debt sustainability. With public debt at record levels and, at the same time, interest rates at very low levels, we need a more dynamic notion of debt that guarantees differentiated reduction trajectories by country and based on a single spending rule.

The revision of fiscal rules cannot ignore the potential of crisis response instruments, such as the SURE and the program Next Generation EU. Financed by European debt, they show that the Union is better protected against shocks thanks to common instruments.

Likewise, fiscal policy coordination requires a fiscal capacity instrument that acts countercyclically in cases of symmetric and asymmetric shocks. This should be part of the toolbox available to the Union, and the European Commission should make full use of its potential.

Parliament has managed to build and adopt a clear position. It is now up to the Commission to present the necessary legislative initiatives, and to the Council, to leave behind its operation in small groups of countries and to create an environment of mutual trust between the Member States. This is what the public expects from the European Union.

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