Proposals

#10 Review EU fiscal rules to increase public spending

The European Central Bank (ECB) has already done a lot to support governments through the financial crises and the Covid-19 crisis. Thanks to quantitative easing (QE) and negative interest rates, government borrowing has never been so cheap. It’s time for governments to help themselves by taking advantage of low rates and increase public deficits to support the economy, beyond the self-imposed limits set by the "Maastricht rules".

The EU fiscal rules, also known as “Maastricht rules” stipulate — in broad terms – that governments should not run a deficit of higher than 3% of their Gross Domestic Product (GDP), and that their total debt level should not go beyond 60% of GDP.

These rules have been criticized for constraining government spending too harshly, and forcing them into austerity policies, like raising taxes or cutting spending. In most countries in the past decades, public investment into welfare, the green transition or infrastructure has decreased.

The Maastricht rules have been suspended during the Covid-19 crisis to allow Member States to cope with the pandemic emergency. They are set to be reviewed before being put into force again. However, many people are concerned that the rules will be re-applied too prematurely, as they were in the last financial crisis. There is a fear that this could lead to the adoption of painful austerity measures by governments, thereby prolonging the crisis.

There are many ways the current rules could be improved. Most importantly, the rules should encourage governments to invest in long-term investments such as in green infrastructure, instead of preventing them to do so. The rules should also reflect the fact that the cost of public debt is currently historically low. In this context, a consensus has formed among economists that government borrowing should not be viewed as a burden, but represents an affordable opportunity to help the economy recover faster.  

➕ Pros

• Making the rules even more flexible and changing the calculations that underpin the rules would make it less painful to cope with crises.
• If governments can make full use of the ECB’s policies by increasing their long-term investments, there could be important synergies between the (fiscal) policies of eurozone governments and the (monetary) policies of the ECB.
• If governments take more of a lead, this can also take some of the burden off the ECB’s shoulders, which has too often been “the only player in town”.

➖ Cons

• Suspending the rules indefinitely would encourage governments to spend carelessly and accumulate even more debt.
• A debt crisis in one country could spill over to other members of the eurozone, as we have seen in the last crisis.
• Higher levels of public debt put pressure on the ECB not to raise interest rates even when it will need to do so in the future. High debt creates a dilemma between securing debt sustainability on the one hand, and controlling inflation on the other.