Eppur si muove! After the European Commisson’s proposal for reforming the EU’s fiscal rules in April, earlier this month, Spain proposed a ‘landing zone’ for the negotiations. It reflects many of the recommendations made in Bruegel’s September paper on the improvement of the fiscal governance proposal.
The new proposal gives something to all sides. Italy gets flexibility, Poland gets explicit recognition of defence spending and Germany and other fiscally conservative members get additional safeguards.
Three concerns remain: first, the additional safeguards might undermine the main purpose of the reform, which is to tailor fiscal adjustment to the debt risks of each member. Requiring significantly more adjustment than what can be justified by the DSA will undermine country ‘ownership’ of this adjustment. Second, the extension of the adjustment period from four to seven years aims to offer incentives for additional investment and reform efforts. RRP reforms have already been agreed and financed through the EU’s Recovery and Resilience Facility. Therefore, the extension should be contingent on convincing reforms and/or investment plans beyond the current RRPs. Third, the proposed rules are not green enough. This relates to the design of the debt and no-backloading safeguards, which could prevent debt-financed investment spending even when the latter is fully consistent with debt sustainability.
The fiscal rules reform may be moving towards a political ending. Whether this will be a satisfactory ending or a return to a blend of overlapping targets and restrictions, many of which without basis in economics, depends on how the proposed safeguards are quantified. And in the green investment area, the proposal that is on the table should be more ambitious. EU endorsed green investment must be exempted from the safeguards.