Rethinking EU Economic Governance in a post-pandemic era

EU flag and people
20 April 2022
Rethinking EU Economic Governance in a post-pandemic era

The COVID-19 crisis and the ongoing war in Ukraine are completely reshuffling the EU and the global order. These events mark more than ever before the need to rethink the economic framework of the European Union and its fiscal rules. The COVID-19 crisis has hit our cities and regions' budgets heavily and has increased inequalities between regions across the EU. Due to the economic challenges and the necessary, forceful policy response, deficits and debt ratios increased in the EU. In terms of the labour market, the crisis has had a severe impact on many economic sectors.

Already before the pandemic, the EU’s economic governance rules did not work properly. In facing the pandemic, the European Union was called on to revise its way of functioning when it comes to its budgetary rules. Now faced with the Kremlin’s war in Ukraine, the revision of the EU Economic Governance is becoming an even more urgent imperative.  

Since the global financial crisis, the European Union’s economic governance has proved inadequate in view of the growing inequalities within the EU and even acted as a driver, eroding Europe’s social model from within. The Stability and Growth Pact, the set of rules designed to ensure that Member States have sound public finances and coordinate their fiscal policies, has been widely criticised for forcing national budgets into a financial straight jacket leading to the build-up of grave social emergencies in the EU.

The current European economic governance is in part responsible for the drastic decrease in public spending, a phenomenon that started in the aftermath of the financial crisis of 2008. Between 2009 and 2018, public investment as a whole fell in the EU by 20% of GDP. Investment by local and regional authorities decreased by almost 25% and by 40% or more in some of the Member States worst affected by the crisis.

Budgetary restrictions, public spending control and the overall implementation of austerity measures took its toll on many European public initiatives and fundamental services. It unfortunately resulted in the aggravation and prolongation of the economic, social and political consequences of the crisis. These limitations still produce major effects on local and regional governments today, which are the authorities responsible for almost a third of public spending and more than half of public investment in the EU as a whole.

The pandemic has increased this burden on them, as explained by PES Group member Elio Di Rupo, Minister-President of the Wallonia region and former Belgian Prime Minister:

“The COVID-19 crisis has created an unprecedented economic, social and budgetary tsunami. Citizens in the EU are suffering terribly from the pandemic's consequences. Our wish is thus that the European economic governance is reviewed and adapted to our territories and regions' realities. Once the pandemic is under control, we cannot go back to the ex-ante status quo, nor continue as though nothing has happened.”

With a post-pandemic world within reach, we know that we cannot go back to a business-as-usual approach, but that we must take this opportunity to complete, accelerate, deepen and broaden the EU’s architecture, updating its outdated economic and budgetary rules. This would help us close widening inequalities, support our local and regional authorities in their action and help us achieve the objectives of the European Green Deal and the European Pillar of Social Rights.

A more inclusive EU economic governance framework 

This year, the European Commission is planning to present a revised legislative proposal that will update the EU’s economic governance framework, introduced in February 2020 and suspended during the pandemic. 

Economic coordination is crucial to ensure good functioning of the European Union, especially considering the shared monetary regime that we have and the homogeneous economic structure that we are slowly creating in Europe. A comprehensive economic governance framework should include and take into consideration any relevant development that can impact the economy at all levels of society. This means not only looking at the negative spillovers related to the fiscal policy, but also to other macroeconomic elements that jeopardise the European economic balance.

As the Commissioner for Economy Paolo Gentiloni acknowledged, “over the years, our fiscal rules have become too complex and hard to understand, due to the multiplication of sub rules and the reliance on variables that are subject to continuous revision. So simplifying the framework is also an essential objective of the review.”

Aware of this gap, the European Commission invited other European institutions including the European Committee of the Regions, the European Central Bank, national central banks, national governments and parliaments and a wide range of stakeholders to take part in a public debate to present recommendations on the next steps to take to improve the current obsolete framework.

Putting an end to austerity: our demands

What the EU’s economic governance lacked in the past years is a comprehensive approach that embraces different local and regional realities, said our rapporteur Elio Di Rupo: “The social, ecological and economic challenges require massive investments. The private sector alone will not be able to bear all these efforts. Without change, European budgetary constraints will prevent the mobilisation of public investment to overcome these challenges”.

These differences have been amplified by the current events that have asymmetrically impacted different EU territories.

For this reason, during the plenary session of the European Committee of the Regions, which will take place on 27-28 April, the institution will welcome the willingness by the European Commission to revise the European Union’s economic governance framework. In the opinion led by PES Group member Elio Di Rupo, we will call for some points that are crucial for a successful reform:

  • Continuing to ensure social security with a follow-up of the Unemployment Risks in an Emergency programme (SURE), translating it into a permanent European unemployment reinsurance scheme;
  • Maintaining the general escape clause of the Stability and Growth Pact , this close activated for the first time during the COVID-19 pandemic, allowed cities and regions on the frontline to make use of their public budgets. It is necessary until a full revision of the economic governance framework is put in place;
  • Exempting local governments from the Stability and Growth Pact rules, as they are not the cause of high public debt and only take debt for investment, so this would allow them to be able to act more efficiently in facing the many challenges on the ground;
  • Ensuring transparency by involving local and regional authorities in the EU economic governance framework
  • Creating a “golden green and social cohesion rule”, excluding from the accounts public investments in projects helping a transition to an environmentally, economically and socially sustainable society, as defined by the Sustainable Development Goals and the European Green Deal;
  • Transforming the European Semester and aligning explicitly and efficiently its economic and financial objectives with the achievement of the Sustainable Development Goals, involving local and regional authorities in this process;
  • Abandoning unanimity when it comes to decision-making in taxation, as the EU needs to progress in this field;
  • Making sure the voice of citizens is heard, as the Conference on the Future of Europe has shown that Europeans want a different future.

The need to change our economic and development model and reinvent the European Unionʼs economic strategy based on long-term sustainable investment and cohesion is one of the core priorities of our Group. 

The EU Economic Governance needs to be adapted to our regions' and cities’ realities. A just economic governance framework needs therefore to take into consideration various factors. In particular, we need to underline the great burden faced by regional and local governments, which during the COVID-19 pandemic spent a large part of their budgets responding to the most urgent challenges in their communities, which led to an increase in their level of public debts. Local and regional authorities need budgetary flexibility to be able to nurture recovery and resilience.

This means involving regions and cities in the reshape of an inclusive economic governance that learned from the COVID-19 pandemic and Ukraine emergency cases and is tailored to address Europe’s specificities. Europe needs a new political compass. Our society’s well-being and progress cannot be equated with the growth rate of the economy. We need to put an end to the failing austerity rules and put forward a new approach that puts people and the planet first. The pandemic and the war in Ukraine show us that there is no time to waste.