European Union: The Instability Pact Is Back

Once rubber-stamped by the European Parliament on April 23, the new version of the so-called “Stability Pact,” which disciplines fiscal policies of EU member states, was approved on April 29 by the European Council of heads of government. Thus, after four years of the suspension decided at the onset of the Covid pandemic, fiscal austerity is once again to rule over EU economies, at least formally. The new rules are officially “softer” because they allow exceptions to balanced budgets, but those exceptions are paid for dearly in terms of a loss of sovereignty. The reformed Pact forces high-debt countries to implement a four-year plan (that can be stretched to seven years in particular cases) to reduce their deficit to 1.5% of GDP. For countries with a debt over 90% of GDP (such as Italy, but also France and a dozen others), a yearly spending cut equivalent to 1% of GDP is mandatory.

In reality, it would be better called the “Instability Pact”, because that’s what it will produce, provided the brutal budget cuts and tax increases needed to meet the targets are implemented. It will more likely fail to do so, but not before causing severe damage.

In addition to the socially unsustainable austerity planned, the re-introduction of fiscal constraints comes together with increased expenditures for defense and for the energy transition, making their implementation almost impossible – unless at the cost of unbearable social sacrifices.

The return of austerity in the EU is apparently contradicted by the strategy, reportedly pushed by France’s Emmanuel Macron and other EU leaders, to have former ECB chairman Mario Draghi become the successor to outgoing Commission head Ursula von der Leyen. At the High-Level Conference on the European Pillar of Social Rights in La Hulpe, Belgium, on April 16, Draghi held a speech praised in the media as his “electoral platform”, in which he called for a “radical change” in EU policies and blasted the “procyclical” policies implemented in the past.

The contradiction, however, is only apparent. Offering an advanced preview of the report on competitiveness that he will present in June, after the European elections, Draghi indicated three sectors in which growth should be promoted: defense, digitalization and climate investments. How to finance them? “The public sector has an important role to play, and (…) we can better use the joint borrowing capacity of the EU, especially in areas – like defence – where fragmented spending reduces our overall effectiveness.”

In other words, while governments are prohibited from taking on debts, the EU should be allowed to do so. Draghi’s reference is to a common European debt sold on the financial markets, such as the “recovery fund” launched in the aftermath of the Covid pandemic. “Most of the investment gap will need to be covered by private investment”, he said, such as from private savings channeled into the Capital Markets Union. Hjalmar Schacht, anyone?