A reform of the fiscal rules regulating public spending, debts and investments in EU countries is currently being prepared by the European Commission. The Real Economy asks what this means for the future of government spending at AB’, particularly investments in tackling climate change.
Dutch finance minister Sigrid Kaag and Spanish finance minister Nadia Calviño are calling for a reform that would enable public investments needed to implement green and digital transitions.
The two finance ministers presented their joint statements on Monday (April 4th) in ’, Luxembourg, on the margins of a meeting attended by all eurozone finance ministers.
What are AB’'s financial rules?
The current financial rules, the Maastricht Agreement’na and the Eurozone in 1992, date back to the beginning of ’ and determine how countries manage public finances. Basically, it's: Gross Domestic Product of the annual financial deficit of ’ %3Limitation to ’u and general government debt %Must not exceed 60’
It was temporarily suspended during the pandemic so that governments could spend more, but they will return in 2023’.
But with the growing public debt, the need for state investment to help Europe’ turn green and digital, and now with the war of Russia’ in Ukraine, what does this mean for the future of financial rules?
The European Commission has published consultations with trade unions, academics, central banks, national parliaments and EU finance ministers, as well as a review of the economic governance framework. Recommendations are expected at the end of 2022’.
The joint document, drafted by the Dutch and Spanish finance ministers, calls for country-specific financial plans and a simple spending rule.
How to prioritize green investment?
The review looks at how to ensure that government finances remain sustainable, but also how to encourage green investment in particular.
BelgiumThe ’ town of Valon, Verviers, has already felt the effects of climate change. Last summer, the river Vesdres flooded with devastating consequences.
Reconstruction and future adaptation is expected to cost 45 million Euro’ for public buildings alone. This is a cost that weighs heavily on the city's budget.
Mayor Muriel Targnion told Real Economy’ye: “ It's a human tragedy, because I think we've lost 38 people, including 8’i Verviers’te.
Targnion, “Climate experts predict more floods in 10, maybe 15 years. They're also talking about heatwaves, so we need to rebuild with that in mind. But durable constructions are costly. Our borrowing capacity is limited, we are only allowed to borrow up to 125 Euro’ per person.”
In addition to the cost of adapting to living with climate change, investments are urgently needed to reduce carbon emissions.
The European Commission estimates that private and public investment should increase by €392 billion annually by 2030.
One of the most important areas for investment is energy production.
According to Walburga Hemetsberger, CEO of Solarpower Europe, ’, in the solar energy sector, today we want to switch from one hundred sixty-five gigawatt “ (which powers roughly 50 million households in Europe ’) to one terawatt ’.
“, that's one hundred and seventeen billion cubic meters of gas. RussiaThis is almost all of ’'s imports. Many can come from private investments, but of course member states also need to play a role”.
Public debt ceiling calls for reform
BelgiumPublic debt already in ’GDP’nin 1’ine has arrived.
Among those calling for reform of the public debt ceiling is an NGO called the European Climate Action Network.
Isabelle Brachet, CANE’in Financial Reform Policy Coordinator, says “The problem is not urgent. “But the problem is at the door because these rules will come into force again. Climate change is expected to ultimately affect the efficiency of the economy. If we don't act now on climate change, there can't be debt sustainability, and, you know, the unions say there can't be jobs on a dead planet, and I mean there can't be debt sustainability on a dead planet. That's why we need reforms to EU fiscal rules that restrict public spending.”
RussiaAs energy prices rise rapidly following sanctions imposed over ’'s invasion of Ukraine, the need to reduce dependence on Russian energy could be an additional impetus for AB’ to reform its financial rules.
Financial rules are being reviewed at the European Commission ’ in Brussels, and Real Economy met with Economic Commissioner Paolo Gentiloni to see what awaits him.
Naomi Lloyd, euronews:It was time for a review of fiscal policy. Then there was the pandemic, the economic recession, and now Russia, ’'s aggression against Ukraine, ’. What does this mean in terms of financial rules? Are we looking at the basic rules: %3, %Is the 60’ being rewritten?
EU Commissioner for Economic Affairs Paolo Gentiloni:I'm not sure that's a real target anymore. We all know that these thresholds were set 25 years ago. Currently the Eurozone’nde average %We have a debt level close to 100’. I think we need to adapt our rules to have a gradual path of debt reduction that allows us to make the necessary investment. And that's the real challenge, it's more than just changing these thresholds, because it has to lead to changes in treaties and referendums. It's not an easy path in these complicated times.
Naomi Lloyd, euronews:Large public investments are already needed to achieve climate goals. This situation is now even more urgent due to the need to reduce the dependence on Russian energy. What does this mean in terms of prospective fiscal policy?
EU Commissioner for Economic Affairs Paolo Gentiloni:In the previous crisis, I think we had a very clear experience in the financial crisis. Financial rules tightened too early and we experienced a gradual decline in public investment. This is absolutely impossible in the situation we are in. We are committed to climate transition and digital transition. And then, as you said, Russia has the autonomy to get rid of ’ian energy dependence. We have a new European passion for common defence. Therefore, we need fiscal rules that take care of the sustainability of public finance but also create space for public investments. What happened during these terrible crises of the pandemic and the war was a message of the necessity of unity. We need a stronger European ’, and you need stronger coordination to have a stronger European ’. And, of course, financial rules are essential.
