Chart showing the budget deficit of the Eurozone for 2020 as a% of GPD

The EU's broken budget rules are not yet being resolved

The debate over what to do with the EU's broken tax regime is heating up as European governments face the prospect of a double recession and rising public debt and deficits that will take years to correct.

The European Fiscal Board, an independent body advising the European Commission, made a notable contribution to the debate on Wednesday when it called on policymakers to capture the nettle of reforms and the temporary suspension of the Stability and Growth Pact during Covid -19 to make the most of crisis.

The EFB and its chairman, Niels Thygesen, want the finance ministers of the Commission and the euro zone to use the next 12 months to deal with countless complaints about the state of the SGP.

Prior to the outbreak of the pandemic, these criticisms centered on the Byzantine complexity of the goals set out in the rulebook and the overly generous interpretations the Commission had given to high-debt countries. It was a subject that frustrated northern falcons, who wanted more discipline, as well as southern pigeons, who were annoyed with the goals.

With the outbreak of the pandemic, calls for change are getting louder, especially from critics who want a fundamental review of whether a 60 percent debt-to-GDP target and a 3 percent deficit limit for a pandemic-hit world in the eurozone The debt is 100 percent of GDP.

Olivier Blanchard, former chief economist at the IMF, calls, among other things, for a fundamental change in the rules. "We should be intellectually ambitious and not make any marginal adjustments," Blanchard said this week. France's European Minister Clement Beaune seems to think the same way.

But politics remains tricky. With a deteriorating health situation and new restrictions on the economies of the Member States, there is a risk that a reopening of a debate on fiscal rules too soon will frighten the markets. The message that eurozone governments must now project is that fiscal support will last as long as it is needed – not that they will get caught up in a renewed battle to tackle public debt. So do not expect the finance ministers to be drawn into the debate on the reform of the SGP for the time being.

In addition, the Commission wants to ensure that it can enforce the € 750 billion recovery fund – including ratification in national parliaments – before engaging in controversial discussions on budgetary rules. Paolo Gentiloni, EU economic commissioner, said at an event on Tuesday that the commission will not present its own reform proposals until the process of approving the EU's next generation program is complete.

Alluding to the political sensitivity of the debate, the EFB report seeks to offer practical reforms, not blue-skinned thinking, that avoid opening “Pandora's Box” to treaty changes.

According to the report, the debt rule can be applied intelligently by allowing the highest debt economies such as Spain and Italy more time to reduce their borrowing. This would be a shift from the current standard metric of an annual reduction of 1/20, which applies to all Member States above the 60 percent cap. The EFB also calls for avoiding the application of the rules to punish urgently needed capital expenditures.

Such reforms may seem extremely sensible – but that does not explain the toxicity of the eurozone cracks vis-à-vis fiscal policy. Despite all the upheavals sparked by the Covid-19 crisis, this is a grim constant in EU politics that is likely to survive for a long time.

Chart du jour: Europe's hidden deaths

France and Germany caused almost all of the deaths, while Britain, Italy and Spain did not

In February, Spain's chief doctor Fernando Simón was in great demand when asked about Covid-19: "There is no virus in Spain." But even then, the virus was spreading across the country and Spain was “blindly” heading for one of the worst coronavirus outbreaks in Europe.

This misstep resulted in a large gap in reported deaths from Covid-19 compared to the mountain of excessive deaths shown in the table above. This is just one of the many revelations the FT Europe network has reported to the FT in a series of inquiries into whether the world could have been spared.

Summary of Europa News

ZTE and Huawei logo
© AFP, Getty

  • Sweden, together with the USA and Great Britain, has banned the Chinese telecommunications companies ZTE and Huawei from setting up the country's 5G network. The Swedish Foreign Minister named China's aggressive espionage and digital theft as the main reasons for the ban. (FT)

  • The European Commission has taken legal action against Cyprus and Malta in an attempt to stop the countries' practice of selling passports for cash. Brussels argues that “golden pass” systems threaten the “very essence of European citizenship”. (FT)

  • Agriculture is one of the largest recipients of the EU's multiannual budget, at EUR 387 billion. An investigation by Der Spiegel showed that the enormous sums of money are easy to profit after a MEP, Peter Jahr, drafted an agricultural law that gave him thousands of EU subsidies for his farm in Saxony.

  • The EU Cybersecurity Agency has detailed the challenges the continent is facing online, including the stress caused by large parts of the continent now working from home. The agency's annual report warns that the increasing reliance on the Internet creates numerous threats that have pushed the European cybersecurity sector to its limits.

Come on Wednesday

The EU budget negotiators from Parliament and the Council will meet on Wednesday evening (5:30 p.m. CET) to try to reach an agreement on the bloc’s € 1.8 billion budget and recovery fund.

After two months of clashes, Parliament has said it is sticking to its call to increase spending by around EUR 39 billion. But as the heads of state and government of the EU made clear at their summit last week, the demands are a no-go.

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