Enabling the EU wellbeing economy: we need a new pact, not a rule tweak

Today, the European Commission (EC) released an orientation paper which sets out the reform direction for the Stability and Growth Pact (SGP), EU fiscal rules, and the wider EU economic governance. The paper covers several long-overdue reforms, yet it fails to induce the paradigm shift needed to enable a just transition towards a wellbeing economy, writes Katy Wiese.

The orientation paper on EU economic governance proposes some welcome reforms focusing on simplification and stronger enforcement of fiscal rules. It flags country-specific debt reduction pathways and slashes the 1/20th rule (the need for countries to reduce debt by 5% to GDP when exceeding 60% debt to GDP), highlighting the urgency for the EU to agree on new rules before the general escape clause is deactivated. These reforms are positive steps in the right direction, but at the same time, they are just mere updates of the existing rules. Our communities and planet need a more radical step forward, as the converging crises, we are currently facing show us. This new reality demands meaningful, transformational change, hence the need for a new set of rules altogether. It is past time to replace the SGP with a Sustainability and Well-Being Pact.

A framework of the past

The EU economic governance framework has been contested since its inception in the 1990s and has also been reformed several times. Its focus is based on the old paradigm of indiscriminate economic growth, failing to be receptive to social and environmental challenges, and fostering systemic transformation. Assumptions and reference values such as the 60% debt and 3% deficit limit have been challenged and disproved by both theory and empirical evidence. Among other things, the framework fails to achieve countercyclical economic stabilisation and is further unconcerned about the quality of spending, completely ignoring long-term fiscal risks arising from climate and environmental crises (read more about its shortcomings here).

In response to the Covid-19 pandemic, policymakers did take steps that were unimaginable before the pandemic. The debt and deficit rules were suspended, and the Recovery and Resilience Facility was established to jointly finance recovery measures. This allowed governments to increase investment and support their economies through these challenging times. In response to the economic impact of the war on Ukraine, the Commission decided to further extend the suspension of the fiscal rules until the end of 2023.

Furthermore, acknowledging that these measures are only temporary, the EC relaunched its review of the European Economic Governance framework which includes the SGP and fiscal rules in 2021. Almost one year later, today, it released an orientation paper which sets out the direction of potential reforms to the framework for further discussion before presenting a legislative proposal in 2023. This is important as any return to the rules would be a shot in the foot for the EU, as it would immediately trigger austerity policies, with devastating impacts on livelihoods as experienced after the financial crises in 2008.

The SGP needs to be replaced

The proposed plans offer more flexibility, but the arbitrary debt and deficit rules of 60% and 3% remain untouched. The new orientation paper suggests country-specific debt reduction pathways that counteract the current debt rules, with its one-size fits all solution and the unrealistic debt reduction plans for the many member states. The idea is that the member states would follow the EU's proposed four-year plans to reduce debt. These plans can be extended to up to three years if member states commit to undergoing reforms and the so-called ''growth-enhancing'' investments, as was done during the Covid-19 crisis. The EC mentions that, as a criteria to determine if investments justify a slower debt pathway, they should contribute to achieving EU-agreed goals such as National Energy and Climate Plans and the European Pillar of Social Rights. This links to the quality of much-needed investments. However, there is no mention of preferential treatment of green investment and a ban on environmentally harmful subsidies (especially fossil fuels). There is also no mention of strong measures against corruption and misuse of public money, which should be a precondition.

The EC highlights the need to increase national ownership and dialogue through e.g. adoption of medium-term plans by the Council. However, it will be important to increase the role of national and European parliaments in the decision-making processes as it is rather limited right now and also hinders effectiveness.

To see if an EU country is on track with the multi-annual plan, EC would annually check progress in the context of the European Semester using an expenditure benchmark instead of using complex indicators that have been long contested. However, just implementing an expenditure rule is not enough to stimulate the investments and green spending that Europe needs. 'Beyond GDP' indicators are needed to unleash a paradigm shift and guide investments and public spending towards social and environmental goals. In general, the high number of references to green growth is concerning. Recent scientific evidence shows that green growth has not occurred at anywhere near the scale required to stay below 1.5° C and is considered extremely unlikely to be achieved in the future.

Overall, these reform tweaks will be not sufficient to introduce a paradigm shift. The low debt targets still apply, which were a driving force behind the austerity after the financial crisis of 2008, effectively hampering transition towards a wellbeing economy. It further heavily relies on the heavily contested green growth.

In general, reform proposals may enhance short-term fiscal resilience and flexibility, but they are not enough to address the need to transform the economy and tackle systemic social and environmental challenges.

Changing the direction

For years, the EEB has supported the public dialogue on the necessary economic reforms. In 2018, we led a petition written by 243 academics and signed by nearly 100,000 Europeans, demanding a deep transformation of the SGP. Our Secretary General Patrick ten Brink handed the petition to Executive Vice-President for the European Green Deal Frans Timmermans in November that year. The latter promised to take the petition into account in future reform processes.

In November 2018, EEB Secretary General Patrick ten Brink presented the petition on the need to end the EU's reliance on growth to Executive Vice-President for the European Green Deal Frans Timmermans.

In the short-term, we need to:

• Put environmental, social and intersectional justice goals at the heart of EU economic governance enabling people and nature to thrive together.
• Agree on new rules before the general escape clause is deactivated to avoid austerity and increase the flexibility of the use of the escape clause to facilitate the transition and to manage crises better.
• Exempt green and social investment from the rules of the SGP to ensure a socially just transition and ban support of environmentally harmful activities, paired with stronger policies on anti-corruption and misuse of public money.
• Make economic governance more transparent and democratic to increase accountability and enhance the inclusion of the European Parliament and other stakeholders.

More importantly, we need a more profound transformation the EU economic governance framework through treaty change in the long-term. In the most immediate term, we must urgently act to enable the establishment of a Sustainability and Wellbeing Pact. The EU must replace the arbitrary numerical values of 3% and 60% with fiscal standards as opposed to the rigid but never-respected rules. Such standards should be based on country-specific assessments using debt sustainability analysis led by independent fiscal councils.

In parallel, we demand EU Institutions and member states to move from words to action on ambitious and inclusive green fiscal reform programmes. Environmental tax reforms, shifting the burden from labour to pollution and resource-use, must become a priority if we want to tackle the climate and environmental crises, while creating fiscal space to finance the just transition and ensure no one is left behind.

Recognising that the failure to adequately price pollution, emissions and resource-use is a key driver of the mounting environmental and social challenges, it is also crucial to rapidly remove any remaining environmentally harmful subsidies. By creating false price signals that incentivise pollution, wasteful use of resources and exploitative practices, the subsidies are slowing the green transition and increasing its overall costs for society. Fixing the way public money is collected and used to transition to an inclusive green economy must therefore be at the core of the EU's reform of its economic governance rules.

The vision for an economic governance framework for people and nature in the EU to thrive together and the feasibility of those measures are elaborated in the EEB position on the EU Economic Governance Framework and the Manifesto for a green, just and democratic European economy.

The future is at stake

If climate breakdown is not given the highest priority the EU will burn in summer fires and drown in spring rain. And if citizens lose hope in public services and in the security of well-paid jobs in green industries, they will push for change.

To this end, the Fiscal Matters coalition of civil society organisations, academics, think tanks, and trade union leaders have published an open letter addressing our concerns and inviting like-minded organisations and individuals to sign and circulate the letter.

We cannot solve the challenges of the future with a framework based on the current economic system which is based on dated principles that no longer fit our present or future challenges. Say no to SGP 2.0, say yes to a Sustainability and Wellbeing Pact.