This is part of a Force Distance Times series on views of industrial and economic policy from Europe. In the first of the series, Chris Cash of the UK Parliament’s China Research Group argued that the country’s new critical minerals strategy represented a comeback for industrial policy. In the second, Dr. Gustavo Piga wrote that an Italian economic policy to save Europe demands grappling with the “austerity trilemma.” Most recently, Mr. Reinhard Bütikofer of the European Parliament outlined a path for the Global Gateway initiative to become not only a reality, but also the foundation for a trusted connectivity network uniting, and strengthening, allies and partners.
Now on the European political table is the European Commission’s (EC) proposal on the rules that should govern the fiscal policy behavior of European Union (EU) member states: How much to tax, how much to spend, how much to borrow annually. It was conceived with the ambition to stand as a new structure to replace the austere one called the Fiscal Compact, which has generated so much economic crisis, polarization, and social tension across Europe. The expectation was therefore that the new proposal would take into account the failures of the past – notably those of the Fiscal Compact –be inspired by effective and cohesive principles.
This has not been the case. The European Commission proposal is worse than the previous one. It threatens to make an already fragile continent even weaker. Why?
First, the proposal is technocratic and not political, a prodrome of failure. The proof? The striking similarity between this 2022 European Commission proposal and the 2018 one in the then annual report of the hyper-conservative European Fiscal Board, ideologically close to the Brussels technocrats. To find such a propositional similarity years later amounts to taking note of how de facto the European Commission has been deaf to any different, and especially any less austere, vision of fiscal policy to avoid the failures of the past. For example, a textual analysis of the proposal clearly reveals the spirit that animated the EC: The most commonly appearing word, featuring 96 times, is “debt.” The word “growth” appears only 34 times.
Italy would do well not to wait for the German reaction: It should instead issue a resounding veto to a proposal that would quickly lead to an internal EU crisis of the most serious magnitude.
Second, there is the issue of asymmetrical treatment toward countries in different conditions. The words “surveillance” and “monitoring” are mentioned 70 times, confirming the initial distrust for some member states considered less virtuous than others. The phrase “public spending” is indeed mentioned 41 times, but always in the sense, as we shall see, of its (net of taxes) reduction in countries with a high debt-GDP. Meanwhile, “employment” and “unemployment,” which should be the object of the greatest attention everywhere, are mentioned a total of 6 times only. And despite the statement in the proposal’s introduction that the “reform is … anchored in a common framework that ensures equal treatment,” the document proceeds only pages later to explain that member states would be obliged to follow “a surveillance framework … that … differentiates more between countries by taking into account their public debt challenges.” In other words, countries that begin from a more difficult starting position would be asked to do not less, but more, in terms of austerity. Such a policy would increase the divergences between EU countries and within each country, and thus the risk of economic and social instability.
And the European Commission proposal goes even farther, widening the furrow that divides countries rather than facilitating their greater unity. It proposes to focus attention on a single key indicator, primary expenditure net of interest expenditure, demanding that each Member State – and especially those with a higher debt-GDP – introduce a (complicated to calculate) ceiling on public expenditure (including capital expenditure) and accept a constantly decreasing dynamic, paying in addition little attention to the quality of spending. This recipe is terribly wrong, as well as ideological, because, while it is indeed aimed at generating a reduction in the debt-GDP ratio, this indicator will tend to rise – as it has done in this past decade – due to the fall in GDP that the lower public spending will generate. The risks to which the new rule would expose the EU is sufficiently underscored by rigorous studies showing that Brexit was caused precisely by an austere reduction in that social spending (on which the EC indicator focuses today).
Last, but perhaps most serious, is the fact that, without fear of a blatant conflict of interest, the European Commission is giving itself agenda-setting powers, claiming for itself the right to establish upstream a framework for adjusting public spending as a reference for each member state. Member states are unlikely to deviate from that reference. Such a power is likely to be challenged in terms of constitutional legitimacy, all the more so if we recall what the German Supreme Court in Karlsruhe had occasion to reiterate only a few years ago: “It is up to the (German) parliament to determine the overall tax burden imposed on citizens and to decide on essential state expenditure. Thus, a transfer of sovereign powers violates the principle of democracy in those cases where the type and level of public expenditure are, to a significant degree, determined at supranational level, depriving Parliament of its decision-making prerogatives.”
Italy would do well not to wait for the German reaction: It should instead issue a resounding veto to a proposal that would quickly lead to an internal EU crisis of the most serious magnitude.
Dr. Gustavo Piga is a professor of Political economy at University of Rome Tor Vergata, where he chairs the Masters in Procurement Management and the BA in Global Governance. He has chaired the Italian Procurement Agency for Goods and Services and is the editor of several books, including the Handbook of Procurement, Cambridge University Press, and Revisiting Keynes: Economic Possibilities for our Grandchildren, MIT Press. Dr. Piga holds a Phd in Economics from Columbia University.
