• Economics Working Group Blog Series - Part 2
  • Stability and Growth Pact – Beware of the Fiscal Challenges!

  • By Marica Frangakis , Roland Kulke | 02 May 23 | Posted under: Economic Governance
  • Last week, the European Commission unveiled its long-awaited proposal to reform the Stability and Growth Pact (SGP). What does the Commission's proposal look like? Does it provide a good basis for the upcoming negotiations with the European Parliament and the Council of Governments? Marica Frangakis is rather sceptical.

    A few days ago, on 26 April, the European Commission presented its long-awaited proposal to reform the Stability and Growth Pact (SGP). The SGP sets common rules for how countries should manage their public spending and tax revenues. Since the eurozone has a common currency but not a sufficiently large common budget, eurozone countries have to coordinate their revenue and expenditure policies in a rather cumbersome way. This is the background to the existence of the SGP.

    The US, unbound by artificial rules such as the nonsensical 3% new debt limit, has consistently shown better growth than the eurozone. No wonder the US is now often better off than the EU, even in sectors such as the car industry and climate technology.

    Reform is needed! So what does the proposal from the EU Commission look like? Does it provide a good basis for the upcoming negotiations with the European Parliament and the Council of Governments?

    Marica Frangakis is rather sceptical about it. There is a lot of work to be done this year by progressive forces in the EP, national parliaments, governments and civil society to ensure that the eurozone has realistic rules that will enable countries to build our economies and societies in a fair and sustainable way.
    (Roland Kulke)

    From power politics to negotiations – a window of opportunity?

    More than three years ago (in February 2020), the European Commission opened the procedure for the review of the SGP, which dated back to the mid-1990s. In the intervening years (1996-2020), the Pact has undergone many changes making it ever more complicated and irrelevant. These changes were not the result of ‘grand bargains’, which historically has been the way of the Union adapting to changing conditions in the economic, social and political fields. Rather, these changes were mostly the result of intergovernmental exchanges under the hegemony of Germany.

    This was the case in the euro crisis (2010), when austerity measures were brutally applied by way of disciplining member states that did not toe the line. Interestingly, under the pressure of the dot.com crisis (in the early 2000s), Germany, France and Portugal violated the rules with no repercussions. Thus, the EU fiscal policy framework is the outcome of a political process that takes place within a hierarchy of sovereign nations.

    The present review of the Pact however marks a departure. The process has been led by the European Commission, which published its Orientations in November 2022, on the basis of which a common position was reached by EU finance ministers in March 2023.

    Civil society organisations, trade unions and other social actors are critical of the Commission’s proposals, mainly on the basis of inadequate recognition being given to the major challenges of climate change, social inequalities and digital transformation. On the other hand, the Commission’s distancing from the one-size-fits-all concept embodied in the existing Pact has been welcomed. It is this feature that Germany is rejecting.

    The German government is blocking rational economics - again

    In particular, the German finance minister, Christian Lindner has argued that “comprehensible and commonly agreed numerical benchmarks are a minimum requirement for ensuring declining debt ratios and equal treatment”, so that debt reduction does not become “a subject of political negotiation” (Christian Lindner: “We need to strengthen EU fiscal rules, not dilute them”; Financial Times, 25th April, 2023). This is a flawed position, to the extent that numerical benchmarks complicate rather than ease the handling of a crisis. This is due to the fact that structures and capabilities of member states vary, and that divergence has become much more common due to policies guided by such numerical rules in the not-too-distant past.

    Different times require different political rules

    Even more importantly, the challenges faced by the EU and by each of its 27 member states are far greater than those of the mid-1990s. Climate change and social inequalities have become enormously pressing. Failing to deal with these challenges carries a heavy price for both the present and the future generations.

    Last but not least, any policy making process is an exercise in politics. The distinction that needs to be made is between ‘good politics’ – democratic, participatory, transparent – and ‘bad’ politics, insensitive to the needs of society or to the views of others.

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