Europe is preparing to tighten its belts. In recent years, public spending has become the safety net cushioning the decline and preventing a major catastrophe from the pandemic and the Russian invasion of Ukraine. But states have already started turning off the tap. The deficit in the first quarter of the year was 3.2% in the euro area. And the trend will continue if countries live up to the promise made by their finance ministers in the last Eurogroup: “We will achieve the necessary global restrictive fiscal stance in the euro area by 2024.” In the same week, the International Monetary Fund (IMF) called for people to follow this path.
Germany, the continent’s big economy, wanted to go ahead with a cut of 36,000 million in its budget project for next year. But it is not at all clear that the other countries want to follow this rhythm. settings, yes Austerity measures like in the last decade, no. The European Commission did not mention the latter in its documents. In March, it deactivated the clause that loosened the Stability Pact’s fiscal corset so that states could come to the rescue of the economy in the pandemic. A clear sign of the change of times. But this is not a 180 degree turn. In the spring budget recommendations, the municipal board does not speak of austerity measures. And his proposal to reform the fiscal rules in the medium term does not go in that direction either.
“There will be a cycle change. Years of fiscal consolidation are upon us. Debt levels have risen since the pandemic. Now is the time to rethink what we have done before, because the debt has increased,” confirms economist Carlos Martínez Mongay. But that hasn’t been the case in the last decade, he explains. The numbers confirm what this Commission’s earlier position explains: the currency area’s public debt amounted to an amount equivalent to 84% of GDP and now stands at 91.2%, even though the economy has long since regained lost activity.
The same description of what will happen comes from Italian Cinzia Alcidi, research director of the Brussels think tank CEPS: “The EU economy has performed quite well, certainly better than many expected.” There is no doubt that the recovery fund and national fiscal policies have played an important role. When the temporary shocks wear off, policy action needs to normalize. This is crucial, even considering there may be more clashes.
The commitment of the European executive is to launch an adjustment path that combines debt reduction – the deficit has become less important in the analyzes in recent years – especially for the most indebted countries (Greece, Italy, Portugal, Spain, France…) with the maintenance of public investments in order not to lose weight in the double green and digital transition. As? Withdraw the extraordinary public aid and use the money to reduce debt. To keep investments going, he relies on the billions arriving in capitals via the Recovery Fund.
That is also the commitment of Judith Arnal, a senior researcher at the Elcano Royal Institute. She also stresses that debt reached 97% of GDP in the worst phase of the pandemic and is now falling: “This trend must continue and be based on credible budgetary consolidation plans in the medium term.” It is necessary to create fiscal space to be able to count on fiscal space in the face of possible new negative macrofinancial disruptions.” The also Professor of the Masters in Banking at the University of Navarra adds that this adjustment “takes into account the current geopolitical environment and must be compatible with the important investments of the EU in the energy, environment and digital fields”.
This analysis is shared in many institutions. For example, the European Central Bank (ECB) recently warned that public investment and debt reduction are needed at the same time. This happens through tax increases or cuts in other spending policies, especially in member states with high levels of debt. The position of the European Fiscal Council, chaired by Danish veteran Niels Thygesen, is similar, albeit with harsher words. “The favorable economic environment prompts the Council to consider tighter fiscal policies appropriate in 2024. In addition, falling inflation and rising interest rates will undermine confidence in public finances.”
However, combining the adjustments needed to reduce debt while maintaining public investment does not seem easy. The same report, which warns of the need for adjustments, says the recovery fund (nearly €800,000 million between 2021 and 2026) is insufficient. It takes more. In its latest future report, the European Commission itself provides an almost unimaginable data situation: The double digital and green change requires 750,000 million annual investments in the EU. “Most of this has to come from the private sector, but Member State budgets will have an important role to play,” he adds.
And here analyzes appear that strongly doubt that it is possible to blow (invest) and suck (debt reduction) at the same time. “The position of the European Commission is a big mistake. It is primitive thinking and a pre-scientific position. It poses no problem if debt growth is used for productive investment. As in the private sector, we need to analyze both government assets and liabilities,” says Paul de Grauwe, professor of economic policy at the London School of Economics. He agrees that it is time to end the extraordinary aid to the energy crisis, but not that this money should be used for debt reduction. “Public investment has a larger multiplier effect on GDP than transfers [ayudas aprobadas por la crisis]. The subsidy system must be ended and investments must be increased,” he emphasizes.
The well-known Belgian economist was already one of the most critical voices of the austerity policy of the past decade and now represents a similar analysis of the authority, which has warned of mistakes in the past: “The cut in the German budget is a mistake.” Germany needs public investment, its stock of public capital is falling. And again, in contrast to the Commission, he does not consider it necessary to differentiate between more or less indebted countries, and he does not consider the rise in interest rates last year, which made bond issues more expensive, to be a problem: “Germany pays 2.4%.” Is that a lot?! Belgium pays 3.1%. Is that a lot?!” “If we don’t invest, we will lose competitiveness compared to China and the USA. China invests heavily. They don’t care about a 3% deficit or 60% debt [referentes fiscales del Pacto de Estabilidad] and this nonsense”, starts the provocateur.
Follow all information from Business And Business on Facebook and Twitteror in our weekly newsletter
Five Day Agenda
The day’s major economic dates, with the keys and context to understand their scope.
RECEIVE IT BY MAIL
Subscribe to continue reading
Read without limits