The European Commission opened a debate on Tuesday on how to reform the EU's fiscal rules to deal with a pandemic-induced surge in public debt and the huge investment needed to combat climate change.
We are re-evaluating this review of our economic governance against the backdrop of enormous investment needs, as the climate emergency becomes more acute with every passing year, said European Economic Commissioner Paolo Gentiloni.
At the same time, the powerful fiscal support provided during the pandemic has led to higher debt levels. These challenges make it all the more essential to have a transparent and effective fiscal framework, he said.
The debate is to produce a third reform of the rules since they were established in 1997 to limit government borrowing to safeguard the value of the euro currency. Revisioned in 2005, 2011 and 2013 the so-called Stability and Growth Pact is so complex that few people fully understand it.
High public debt is the main headache now because public support to European economies during the pandemic boosted average debt in the euro zone to around 100% of national output from 60-70% in the early 1990s when the rules were drafted.
Annual debt reductions required by the current rules simply are not realistic for countries with debts below 200% of GDP like Italy or more than 500% like Greece.
Yet despite many EU finance ministers seeing the debt reduction requirements as too strict, there is currently no consensus on how to deal with it - whether through the interpretation of existing laws or through the more difficult changes to legal texts.
The second big challenge is to make sure that the rules do not tie governments' hands at a time when the 27-country EU needs to mobilise hundreds of billions of euros in order to bring net CO 2 emissions to zero by 2050.
An analysis by the Bruegel think tank for EU finance ministers in September showed additional public investment to meet the EU climate goals will have to be 0.5%-1.0% of GDP annually during this decade alone. Bruegel proposed exempting investment to combat climate change from EU deficit calculations.
The idea has the general backing of Spain, Italy, France and others but officials also point out the difficulty in defining what is and what is not a green investment.
The Commission said that after gathering all the views on what should be done during the debate, it would provide guidance in the first quarter of 2022 for fiscal policy for the period ahead so that governments know what rules to stick to when preparing long-term fiscal plans.