It already feels almost completely normal, but it is still part of that ‘new’, temporary normal. European governments – still – generously draw their wallets to support sectors affected by the corona crisis. Aid packages are being extended, budget deficits and debt levels are also rising this year.
After all, the new normal also means: no restrictive European budget rules. A year ago this month, EU countries decided to cancel the fiscal compact, which prescribes a maximum deficit of 3 percent and a maximum debt of 60 percent of GDP, for the first time in history.
A year later, a return of the pact is not yet imminent. This Wednesday, the European Commission made it clear that it does not expect the rules to be reinstated until 2023 at the earliest. A decision will not officially be taken until May, but no one expects the pact to apply again next year.
Keep pulling the wallet for the time being, is the message that Paolo Gentiloni wants to convey. In a video conversation with a group of journalists, the Italian EU Commissioner (Economy) points out the risks of phasing out the support measures too quickly.
“I hope not,” replies Gentiloni when asked whether he fears that some countries will return to austerity too soon and, in his words, “repeat the mistakes of the previous crisis”. However, he says: “I am very impressed with how broadly the ideas about the risks of premature fiscal consolidation are supported. I was in the G20 meeting last Friday and it’s fascinating how everyone repeated the same thing: it too early withdrawing financial aid is worse than being late. Of course this is a different kind of crisis than twelve years ago, but mistakes were made at the time. And as you can recall, that created a double dip recession in the EU. ”
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Clash of views
Gentiloni is verbose, sometimes mainly thinks out loud about a subject. “Sorry, that was a bit of a long answer,” he says after another list. In Brussels, it is no secret that his views often clash with those of his colleague Valdis Dombrovskis, Vice-President of the European Commission and responsible for trade and financial policy. The two can symbolize the movements within Europe when it comes to fiscal policy, between the flexible and the precise.
Yet those flows, both within the Commission and in the EU, will eventually have to converge in the review of fiscal rules – a hyper-sensitive discussion that started before the corona crisis and continues to divide.
Last week, Gentiloni nevertheless delivered a striking shot in a speech to the European Fiscal Board, an advisory body to the Commission on budget matters. In his contribution, the Italian openly philosophized that in the future the rules might be able to distinguish between ‘good debt’ and ‘bad debt’: the first through investment in research and climate policy, among other things, the second through current expenditure that does not contribute to higher productivity. . Fiscal rules, Gentiloni said, “should be adjusted to improve the composition of public finances and ensure that any new debt is a good debt”.
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These are not original ideas – a group of top economists recently argued for even more differentiation in the European debt standard. But the fact that Gentiloni speculated so openly about it was notable and sparked resentment last week – in Brussels and some capitals.
When asked, Gentiloni emphasizes the context of his speech: at a conference where the budget rules were freely considered. “From an institutional point of view, this was the right time to make these comments,” said the Italian. He is now more cautious: “The view on government debt is very different now than it was ten years ago. The debt level in the eurozone has risen to an average of 102 percent of GDP, which is even less than the average in the OECD countries. The low interest also makes the costs of debt much lower. That does not eliminate the risks of permanently overspending. But if we want to have a serious discussion of the fiscal rules, we have to recognize that there are high levels of debt and see how we can develop new common rules from there. ”
How do you think you will ever find consensus on this in the EU?
“That will be very difficult. At the same time: it is now or never. There are three extraordinary factors. One, everyone now has a much higher debt. Two, there are major investment needs. Not only because of the green transition, but also more generally: to reform the economy after the pandemic, to strengthen health systems. Before the corona crisis, the investment level in Europe was 0.1 percent – so practically nothing. We cannot afford to be without public investment for the next ten years, because we are falling behind in the world. And thirdly, if we could agree on our new recovery fund, we can also reach an agreement on this. ”
This fund is intended, among other things, to prevent the differences within the EU from increasing too much. Do you think it will be able to make a lasting contribution to this?
“That depends on the effects we achieve with it. If we manage to reduce labor market segmentation in Spain, or accelerate legal reform in Italy, then certainly. For the next five years, the fund can in any case have an important balancing effect, because the impact of the support differs within Europe. It is stronger in Spain than in Germany. That is not just solidarity: we all know that a block with the same currency and market cannot cope with too great differences in economic damage. ”
There are economists who predict that corona will permanently lead to a larger public sector. Do you think so too?
“Certainly, that is inevitable. Over the past year we have allowed in Europe to distribute enormous amounts of state aid. This means that the state has undeniably acquired a stronger role in the economy. Ultimately, the challenge is to find the right balance. We cannot go back to the past, but we also cannot permanently let the state decide who survives and who does not. Our rules restricting state aid are part of our European model of competition. We also have to preserve that model. ”
‘Rather too late than stopping aid measures too soon’
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