An EU budget bunfight today begins today as Brussels launches a review of its fiscal rules, seeking to pay down Covid debts while raising cash to cope with climate change.
The rules, known as the Stability and Growth Pact, set EU-wide spending and borrowing limits, but have been called “stupid” and “economically nonsensical” by critics, who say they are too complex, badly enforced and tend to aggravate recessions.
Budget hawks in Germany, The Netherlands, Finland and Austria are resisting any major revisions, but they will have to face down calls from France, Spain, Italy and others who are seeking more flexibility.
Ireland is traditionally on the side of the hawks, although it does have sympathy with its former bailout buddies in the south. However, Pachal Donohoe will have to remain neutral as he steers talks between euro finance ministers at monthly Eurogroup meetings.
The rules were designed at the same time as the single currency, to ensure euro countries sing from the same fiscal hymn sheet.
They were last overhauled in 2013 after the Greek debt crisis, and are seen by many as the main cause of the double-dip recession that followed the financial crash.
They also dealt a hammer blow to public investment, which fell by almost a percentage point of GDP between 2009 and 2013 and by more than half in bailout countries such as Ireland.
That approach has been firmly rejected this time around, with EU economy commissioner Paolo Gentiloni saying recently that slash and burn economics “cannot happen” again.
Ibec’s chief economist Gerard Brady says governments need to pay down Covid debts but not at the cost of green investment.
“That debt will have to come down but you also have to make room for certain types of spending.
“The fiscal rules at the moment treat everything as one blob of money.
"The rules coming out of the crisis are going to have to prioritise things that are important and existential in terms of the climate threat.”
The rules set a limit of 3pc of gross domestic product (GDP) on government deficits and 60pc on debt, and include a requirement to pay down excess debt over 20 years.
The head of the eurozone’s bailout fund, Klaus Regling, one of the architects of the rules, told German magazine Der Spiegel last week that the 20-year rule was “economically nonsensical” and would mean countries like Italy and Greece having to run massive budgetary surpluses very year.
Commission vice-president Valdis Dombrovskis has indicated that he will seek “debt reduction pathways which are realistic for all member states” indicating the EU is flexible on being flexible.
It makes little sense to apply the same rules to diverse economies, said Eddie Casey, chief economist at the Irish Fiscal Advisory Council, particularly given growth and corporate tax receipts are so unpredictable in Ireland.
“A small, open, very volatile economy like Ireland’s can get led in to a sense of complacency by following the rules like this too mechanically,” said Mr Casey.
“What you have to focus on more effectively is reducing fiscal risks, while being less mechanical on applying so many detailed requirements across the board.”
The rules “don’t do a good job of adjusting” for windfall tax gains or for spending rainy day funds, he added.
“If you were trying to do that at the moment, you would be in danger of breaching the rules when and if you eventually spend those savings.
"We’ve argued that you should allow for these types of [rainy day funds]. They are sensible,” Mr Casey said.
Ultra-low interest rates also make it cheaper for governments to borrow and make repayments, making it unnecessary to have a strict debt ceiling.
“The low interest rate environment has been built into the system now for a while,” said Mr Brady. “The thing that really matters is how you treat the different buckets of spending within the rules.”
There have also been across the board calls for simplification of the rules.
A 100-page user manual that accompanies the rules has been blasted by many governments for being incomprehensible, and includes hard-to-measure concepts such as the output gap and the structural budget balance.
Former European Commission president Romano Prodi famously called the rules “stupid” when they were first introduced, a comment he stood by in a recent Reuters interview. It will take a major effort to make them more intelligent and intelligible.
1 Green spending incentives
France, Spain and economists at the influential Bruegel think tank in Brussels want a ‘green golden rule’, where climate-related investments don’t count towards a government’s deficit.
2 Higher debt ceiling
Many countries think the 60pc of GDP deficit limit should be scrapped, along with a requirement to slash excess debt over a 20-year timeline. Economists have long seen debt of more than 90pc of GDP as sustainable, especially given low interest rates.
The 100-page manual accompanying the rules is seen as a mark of how rigid they are. Countries such as France, Spain and Italy want countries’ fiscal positions assessed on their own merits.