COVID-19 pandemic shuts the door on returning to old austerity recipes

10 December 2020
COVID-19 pandemic shuts the door on returning to old austerity recipes

Since the outbreak of the COVID-19 pandemic in March, the whole euro area fell into one of the worst social and economic crisis of our era. On the 20th of March, the European Commission proposed for the first time ever to trigger the general escape clause provided in the current Stability and Growth Pact (SGP). This measure has proven to be essential to strengthen the emergency budgetary measures in response to the COVID-19 pandemic. The general escape clause allows Member States to “escape” from the rigid application of the preventive and corrective arms of the SGP in case of a severe economic downturn in the Union as a whole, and it permits an extension of the deadline for the Member States to correct their excessive deficits under the excessive deficit procedure. Thanks to the SGP’s escape clause, governments have approved unprecedented stimuli amounting to €3.5 trillion in fiscal, liquidity support and guarantees, which in turn helped our cities and regions on the frontline cover the substantial costs provoked by the sanitary crisis. Public spending proved not only to be a necessary mean to provide quality services and goods to our citizens, but also an essential tool to support workers and businesses during the lockdown.

The current European Economic Governance is in part responsible for the drastic decrease in public spending, a phenomenon that started on the aftermath of the financial crisis of 2008. Budgetary restrictions, control of the public spending 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 the 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. It is therefore essential to reform the economic and budgetary rules of the framework. Earlier this year, prior to the outbreak of the pandemic, the European Commission issued a much-expected communication stating its willingness to review the Economic Governance framework. This represents an opportunity to overcome future challenges but also gives a new impetus for more comprehension towards the importance of public investment. Unfortunately, the events that followed the COVID-19 outbreak sidelined this important issue, even though, its importance is more relevant than ever.

During its December plenary, the European Committee of the Regions called for the implementation of the suspension of the Stability and Growth Pact mechanisms during the whole period of COVID-19 pandemic and for a review of the Economic Governance framework. Our member Elio Di Rupo, Minister-President of Wallonia (Belgium), is the rapporteur for this opinion. He stressed the urgent need to update the Economic Governance Review and adapt it to a new European reality: 

“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 will be under control, we cannot go back to the ex-ante status quo nor continue as though nothing happened” Elio Di Rupo, 8 December 2020

This opinion puts an emphasis on the fact that a Member State in recession cannot be forced to reduce its spending at the risk of further aggravating the recession. Many social initiatives have already been launched at EU level. The Committee of the Regions particularly welcomes the social bonds (SURE - Support to mitigate Unemployment Risks in an Emergency) issued by the European Commission in October as a response to the pandemic, which mitigate unemployment risks in an emergency. According to cities and regions, this programme could indeed pave the way for the establishment of a European unemployment reinsurance scheme. There is still a long way to go in order to give Europe, the ideal progressive impulse it urgently needs. However, it is vital to invest in the future of our citizens.

Attenuate the adverse effects of a “double-dip recession”

There is no doubt that the second wave will have a damaging impact in our economy. The closure of many businesses during the last quarter of 2020 will slow economic activity again. Its adverse effects will hit many areas of our economy and disproportionately affect more labour-intensive sectors. If there is one lesson we have learnt from the last economic and financial crisis, it is that austerity cannot be the answer again. This is why, it is key for our public institutions to support and assist their citizens with all the necessary means. It is currently the case in Lisbon (Portugal) where the Socialist mayor and PES member, Fernando Medina, launched a program called #LisboaProtege (Lisbon Protects) which grants up to €8.000 for companies with less than €500.000 business volume and more than 25% of losses this year. Progressive actions like this are what is necessary to bring the economy back on its feet and public spending and investment should not be limited when it comes to support our citizens.     However, more will be needed to overcome the effects of two consecutive economic slowdowns. According to the World Health Organisation (WHO), the pandemic will probably continue for the next two years. Recently, the European Commissioner for the Economy, Paolo Gentiloni, acknowledged that “we need to maintain support to the economy, as much as is needed, for as long as is needed” and added that the escape clause will remain in place “as long as necessary”. Last September, the Commissioner sent a letter to the Member States pledging the extension of the suspension of the SGP in 2021. This is a good start, but more is needed.     

Economic governance is a dense subject. For the most part, the rules are incomprehensible to the public. The Committee of the Regions’ opinion suggests to make its comprehension broader. National, regional and local governments and the public itself should be able to clearly understand the rules to be applied. For that end, it is important to confer a greater importance to non-budgetary indicators and encompass unemployment rates and the progress made in the implementation of the Sustainable Development Goals (SDGs). High-quality public investment has to be perceived as something necessary and inherently virtuous for future generations.

On the same line, it is important to mention that one of the reasons why the current European Economic Governance framework is ineffective, is because it does not take into account the distinction between current expenditure and investment expenditure. Both expenditures serve different goals and shouldn't be combined. As the Committee’s opinion states:

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. Opinion “Economic governance review”— Rapporteur Elio Di Rupo

The contradiction here lies in the fact that the European Fiscal Board concluded in the past, that Member States with high public investment rates tended to significantly reduce it during excessive deficit procedures (EDPs). The European Commission itself noted that the budgetary framework has not prevented a drop in investment or made public finances more conducive to growth and that the SGP’s “investment clause” does not seem to have had a major impact. Discouraging a deficit financing for public investment could encourage underinvestment, to the detriment of future generations. For that same reason, it is important for public spending from Member States, but also from local and regional authorities, to be linked to Structural and Investment Fund co-financing, and not to be included in public or equivalent structural expenditure as defined in the SGP. The CoR calls for the establishment of a potential “golden rule of public investment” in the European Economic Governance framework. The aim: to end the adverse effects of the current budgetary rules and to foster and encourage investment in our future. Furthermore, this measure could be applied as a priority to public investment in projects aimed at encouraging the transition to a sustainable society in environmental, economic and social terms, as defined in the SDGs and the Green Deal. In that regard, the Committee of the Regions advocates for the investment in human capital and skills to facilitate the transition to a climate-neutral, resource-efficient and competitive economy fit for the digital age.

And finally, there is an additional aspect that must be mentioned. In practice, the economic governance is implemented through the European Semester coordination cycle. This way of functioning contributes to the lack of efficiency, especially when it comes to carrying out reforms. One of the causes of this absence of effectiveness is due to the fact that the scope of the reforms – under the European Semester – has never been defined in EU legal texts. This limits greatly the potential interactions between the reforms undertaken at national level and the EU level, and creates an unbalance that is problematic with regard to the principle of subsidiarity. It is crucial to fully associate local and regional authorities as partners in the implementation of the reforms. On the same direction, the Committee underlines the need for a reform of the Eurogroup. Its status needs to be put on a formal footing and updated with a view to a fully-fledged presidency, greater accountability to the European Parliament and more transparent.

Supporting cities and regions on the frontline with high-quality public investment

Making our worst fears come true, a second wave of the COVID-19 pandemic peaks throughout Europe. Local and regional authorities are at the forefront of the fight against the COVID-19 pandemic, and in countries such as Italy and Spain, local and regional authorities are responsible for more than 90% of healthcare expenditure. If on one hand, expenditure is constantly increasing, on the other hand local and regional revenues are being deeply affected by the unprecedented economic slowdown. The European Commission, the Parliament and the Member States should not underestimate the risk that the COVID-19 crisis could aggravate regional disparities.

This crisis should remind us that high-quality public investment is essential for our future. Now that the second wave of infections has struck our society to the core once again, it is important to rethink the current European budgetary framework, so as to avoid making public investment and public services the main “concession” in future budget consolidation programmes.

This crisis has showed us that the SGP is not adapted to our reality and that it does not provide any viable long-term results. Budgetary rules have to be flexible to fight future economic downturns. We must put an end to the spectre of austerity and never get back to the SGP. 



Photo credits: Unsplash/Tabrez Syed