EU Economic Update

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The head of the European Union’s economy stated that Brussels cannot continue to conceal the application of its own fiscal rules to mitigate its negative effects. He called for far-reaching legislative reforms to help promote stronger public investment and growth.

Paolo Gentiloni stated that he hopes to “update and review” the EU budget rules to incentivize public investment in green and digital transformation, while promoting stable and lasting economic growth.

“Obviously, we cannot simply return to normal,” Gentiloni said in an interview with the Financial Times. “You need common rules related to the economic challenges we face. Otherwise, the risk is that the European Commission will find creative ways to circumvent its own rules in the next ten years. I think this is not the best solution we can have. .”

The committee will resume consultations on how to modify the rules surrounding the Stability and Growth Pact (SGP) this fall.Due to the Covid-19 crisis, the budget framework is currently suspended, but the rules may be re-implemented in 2023 and there will be a intense argument Before how they should reform.

US Treasury Secretary Janet Yellen this month expressed her views on those who believe the SGP restricts the government’s freedom to respond to the economic downturn because she called on the European Union to step up stimulus measures. But the fiscally conservative Nordic member states will oppose efforts to substantially loosen rules and rekindle the differences in North-South economic policies.

Gentiloni stated that he does not believe that the committee’s role is to challenge the EU treaty, which contains the basic goals of keeping public debt at 60% of GDP and the deficit at 3%. But he said that he hopes that the committee will propose legislative reforms to reflect the realities after the pandemic, including the surge in the average public debt burden of the Eurozone to 100% of GDP.

He questioned whether the EU should return to the “long-term low”-low inflation, low growth, low interest rates? Or should we try to take advantage of this crisis… Strive to achieve stronger and more sustainable growth?”

He supports a number of reforms, including adjustments to the rules on statutory ways to reduce the public debt ratio, which under the current framework will require deep and punitive reductions after the debt outbreak in the past year.

He said that these changes will need to shift to more “simple and observable” standards for managing fiscal policy, referring to the recommendations of the European Finance Committee, the committee’s advisory body, on setting budget policies based on “expenditure rules.” The upper limit of the growth rate of nominal public expenditure.

In addition, the rules need to be revised to incentivize public investment. This will help avoid recurring the consequences of the financial crisis, when net investment fell rapidly and hindered growth.

One idea is the “golden rule”, which excludes certain growth-promoting expenditures from the upper limit of expenditure growth, but Gentiloni emphasizes that he is not bound to this specific concept. “If we recognize the need to encourage and strengthen public investment in certain sectors, then there are many possible solutions and suggestions.”

Gentiloni said that the “huddle” budget rules previously seemed reasonable, but he believes that given this situation, the legislation needs to be revised. “This is the only way to have real common rules, not just common rules that can be bypassed,” he said.

Gentiloni reiterated the optimistic short-term Economic outlook This month, when the committee issued its forecast, he proposed the strongest growth in decades, which will grow by 4.8% this year and 4.5% next year.

Although the spread of the Delta coronavirus variant poses a “downside risk” to growth, he emphasized that given the rapid pace of Covid vaccination, the current situation is much more favorable. He pointed out that the European Union has caught up with the US adult vaccination rate.

“We are very aware that we are not out of the predicament. At the same time, we should be very clear that we are in a different situation from last summer. This difference is caused by vaccines and vaccinations,” Gentiloni said.

Individual liquidity indicators and the severity of the lockdown measures continue to indicate that the economy is recovering “rapidly.”

“I think the recovery will continue. All in all, what we see on the ground still supports our brighter predictions,” he said.