The Europe of adjustments, that of the period after the crisis of 2008, will take a long time to return. The coronavirus pandemic and its correlate of economic destruction made the bloc’s fiscal and economic policies turn. What seemed like an exception of months can become a solution at least in the medium term. In the long run, as Keynes said, all dead.
It all started a year ago. Faced with the foreseeable and profound economic crisis that is looming due to health measures to stop the spread of the first wave of the virus, the European Commission unilaterally decided to activate the so-called ‘escape clause’ of the Stability and Growth Pact. In practice, it ceased to apply that pact and to monitor deficit and debt levels. The message coming out of Brussels was clear: “Visitors!”.
Massive public spending to sustain economies that announced collapse, companies that threatened to close one after another and millions of workers who could be seen on the street. Behind, the lifeline of the European Central Bank, which with its debt purchases keeps country risk at bay to the point that the entire Eurozone is being financed at historically low rates.
Months passed and the European Commission formally communicated by letter to the Ministers of Economy and Finance that in 2021 the ‘escape clause’ would continue to be activated and therefore I would still not look much at either deficit or public debt. No EU country meets these limits right now, which the Stability and Growth Pact sets at 3% of the public deficit and 60% of public debt. The latest forecasts from Brussels suggest that the Eurozone will close 2021 with a deficit of 6% and a public debt of 100%.
Some governments wanted to open the debate on what to do in 2022 but the German ordered the braking. With French, Italian and Spanish support, Germany demanded that this debate be put on hold until it knows how the European economies evolve in the coming months and at what rate the population is vaccinated. It will be discussed in May (which is when it is due), was the message from German Minister Olaf Scholz. The European Commission will make its recommendation this Wednesday, but everything indicates that the ‘escape clause’ will remain activated.
Spending and debt
The German irruption was the signal that the European Commission needed to accept what France has been asking for for months: not to be reapplied the Stability and Growth Pact without first reforming it. European countries will emerge from the pandemic with public deficit and public debt rates to which, if the rules of the pact are applied, it would be necessary to deal with a corrective in the form of adjustment that would sink the economies.
That French message, which Italy and Spain support, has been the message of the European Commission since Friday. In a conference held in Brussels, the European Commissioner for the Economy, the Italian Paolo Gentiloni, said that fiscal rules must be adapted to allow countries to spend more to foster growth and fully emerge from the crisis. Gentiloni believes that a new framework is needed that takes into account both public spending in a different way as the composition of the debt.
The commissioner points out that the pact should be reformed so as not to treat current spending and spending on infrastructure or education equally and that this should be taken into account in any analysis on debt sustainability. Gentiloni admits that governments should, as soon as they grow strongly, continue to reduce deficits and debt, but that they should do so with “A credible mechanism”That does not involve adjustments that lead to another economic contraction.
Another of the possible reforms would be to make the Pact more oriented to the economic situation in the medium and long term and not only to the deficit and debt data for a specific year. Gentiloni also aims to separate “good and bad debt.” What is the good? According to the commissioner, the one destined to finance “investigation, education, infrastructures or sanitary cares”. The bad? The one that goes to current expenditure or does not improve competitiveness and productive capacity.
The Brussels forecasts consider that the European country that will grow the most this year will be Spain with 5.6% while the average for the Eurozone will be 3.8%. Clearly insufficient to recover what was lost in 2020, when the Eurozone sank by 6.8%, its second largest ever fall after 2.9% in 2009, the year after the great financial collapse.
The debate on the need to reform the Stability and Growth Pact predates the pandemic, but it reinforced the defenders of that reform, which already seems accepted by the European Commission. In Brussels for years it has been said with small mouths that the pact, in its current design, does not favor stability or growth.