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Breaking The Stalemate

Updated: Oct 9, 2023

Read full report here Addressing Europe’s economic, environmental, and social challenges calls for reform and significant public and private investment. Estimates of what is needed to bridge funding gaps are daunting: €520 billion a year until 2030 to meet EU environmental objectives, €142 billion a year for social infrastructure such as hospitals and schools, along with €190 billion a year to stabilise the stock of public capital – such as publicly-owned roads, buildings, bridges and ports.[1]

Many calls have been made over the past decade for private finance to fill these gaps, as the world bathes in abundant liquidity and private capital. Although these calls appear logical, funding gaps remain precisely because the private sector has little appetite to finance these investments, which are marked by low profitability or high risk.

Europe needs to update its view of the role played by the public sector and move beyond the 90s vision of economic governance. Better regulation is needed. But evidence also points to the need for better economic and fiscal policies to shape (new) markets, change incentives, and catalyse significant amounts of private capital towards EU’s objectives and global commitments. As it stands EU governments remain constrained by the European economic governance framework – a maze of rules built over 30 years on questionable assumptions about public debt and the role of the state.

European economic governance was created for a completely different macroeconomic environment. In the 1990s debt servicing costs were a significant part of Member States budgets, accounting for 3,5-11% of GDP, as governments struggled with high inflation and high long-term sovereign interest rates (7-25%).[5] In this context, creating binding numerical fiscal limits was perceived as a necessity to ensure that Member States could continue to service their debt – therefore limiting contagion risks inside the euro area – without assistance or bailout by other members or by the European Central Bank.[6]

The time has come for Europe to upgrade its economic governance framework. Thirty years after Maastricht rules first came into force, the same European countries have experienced a prolonged period of deflation risks – only recently eclipsed by temporary supply-induced inflation peaks[7] – and a continuous fall in long-term interest rates. In other words: servicing public debt has never cost so little to European governments. Most governments are able to sustain a much higher level of debt-to-GDP. Many calls have therefore been made to allow more leeway for qualitative public expenditures aimed at tackling Europe’s challenges.

After a first attempt was interrupted by the Covid crisis, in October 2021 the European Commission relaunched its public debate on the review of the European economic governance framework. Meanwhile, EU Member States remain divided on the need for reform and on which road to follow. This Finance Watch answer to the Commission’s consultation outlines 13 reform proposals to move beyond this stalemate and upgrade the framework to make it fit for our time.

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