Opinion

A role for the Recovery and Resilience Facility in a new fiscal framework

Discussions on reforming European Union fiscal rules must consider a more permanent but targeted role for the Recovery and Resilience fund to meet climate ambitions.

By: Date: January 10, 2022 Topic: Macroeconomic policy

This opinion piece was originally published in Kathimerini and El Economista.

 

EU countries used fiscal policy to deal with the health crisis and contain the economic fallout that followed. But the EU collectively has also provided a recovery plan with the creation of the Recovery and Resilience Facility (RRF).

A temporary suspension of the EU’s fiscal rules, known as the Maastricht rules, and the European Central Banks’s quantitative easing program that kept the cost of borrowing low, allowed all countries to access the markets, borrow and finance the very much needed stimulus.

But this cannot last forever. The Maastricht rules cannot remain suspended for much longer, nor can fiscal policy be used with quite the same freedom as it did since 2020. The European Commission has announced that the rules will be reinstated at the start of 2023.

Many now agree that while the rationale of the rules is crucial and still valid, they have not served their purpose well.  Fiscal policy has been underused in economic downturns, when it is actually needed the most, and similarly it has been overused in economic booms, when it is the time to build up buffers.

At the same time, the most obvious victim of fiscal consolidation has been public investment. In hard times when fiscal spending is cut, it is politically impossible to cut things like social security or health and education expenditure. It is much easier to cut public investments, the benefits of which are not visible for many years, a phenomenon known as the ‘tragedy of the horizons’.  So, investment has taken a big hit in the past 20 years, with especially highly indebted countries seeing a significant drop.

2022 offers an opportunity to reform the rules in order to correct this procyclical character of fiscal policy, without jeopardising the future level of welfare by postponing investment.

But countries do not start with a clean slate, as many have high levels of debt. Even if future rules differentiate between current expenditures and investments, not all countries will be able to make the necessary investments at the speed and scale required. Delays and under-investments will be detrimental for the countries themselves but will also undermine the EU’s collective green ambitions.

This is where the RRF can make a difference. Indeed, this problem is not visible for the next five years while funds finance green and digital investments. The objective and scope of this instrument was precisely to help countries keep up a minimum level of ambition that is common to all and consistent with EU objectives, while allowing national funds to manage the pandemic.

But when the fund ends, national debts will become a real constraint. And it will be just as important then to continue with investments without risking fiscal sustainability for anyone.

The RRF offers a good template for ensuring that the EU’s green and digital investments advance at a minimum pace that is high enough but also feasible for all. It thus helps avoid the tragedy of the horizons for those countries that will face constraints.  Additionally, as it is centrally monitored, it can reduce incentives to pass all investments as green (and hence not be subject to fiscal rules), known as greenwashing. Admittedly, the fund is currently in the process of being tested. But it has passed a big first political economy obstacle: that of being accepted as an instrument for sharing risks when it comes to European public goods.

The coming year offers an opportunity to rethink not only the fiscal rules but the broader fiscal framework. The EU can do that without having to invent new tools or structures but simply apply what is already available and in force in ways that are consistent with its ambitions.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read about event More on this topic
 

Past Event

Past Event

A debate on fiscal rules and the new monetary strategy

Presentation of the Yearbook of the Euro 2022.

Speakers: Maria Demertzis, Fernando Fernández, Gonzalo García Andrés, José Carlos García de Quevedo, Pablo Hernández de Cos and Jorge Yzaguirre Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 17, 2022
Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 24, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What should public spending look like?

What should we do about the increase in public spending due to COVID-19? Bruegel Director Guntram Wolff and Former Deputy Secretary-General of OECD Ludger Schuknecht discuss.

By: The Sound of Economics Topic: Global economy and trade Date: July 14, 2021
Read article More on this topic More by this author
 

Opinion

Is Bidenomics more than catch-up?

The Biden administration's promises to 'think big' and rebuild the country seem like a major historical departure from decades of policy orthodoxy.

By: Jean Pisani-Ferry Topic: Global economy and trade Date: June 3, 2021
Read article More on this topic More by this author
 

Blog Post

International tax debate moves from digital focus to global minimum

International corporate tax reform is coming closer if countries can set aside their differences and work for progress rather than the perfect deal.

By: Rebecca Christie Topic: Global economy and trade Date: May 27, 2021
Read article More by this author
 

Opinion

European governance

Europe must fix its fiscal rules

The pandemic has shown that the EU’s spending framework reflects an outdated economic orthodoxy.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: May 27, 2021
Read about event More on this topic
 

Past Event

Past Event

After COVID-19: a most wanted recovery

This event, jointly organised with ISPI, as the National Coordinator and Chair of the T20 Italy, is part of the T20 Spring Roundtables and it will focus on strategies for a swift and sustainable economic recovery for Europe.

Speakers: Franco Bruni, Maria Demertzis, Elena Flores, Paul De Grauwe, Christian Odendahl, Miguel Otero-Iglesias and André Sapir Topic: Macroeconomic policy Date: May 19, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Macroeconomic outlook: are we back on track?

Summary of the macro outlook based on Commission forecasts and analysis of the global picture.

By: The Sound of Economics Topic: Macroeconomic policy Date: March 5, 2021
Load more posts