New orientations for the EU fiscal rules reform – enough to support a just transition?

Early November, the European Commission published orientations for the upcoming reform of the EU economic governance framework. The orientations follow an online public consultation and debates with Member States and stakeholders on the future of the framework, which Social Platform contributed to, in line with our position on the topic. 

Following what’s going on with the EU economic governance framework isn’t always straightforward: here’s our breakdown of how the Commission plans to reform its fiscal rules. 

Remember, for a quick recap of what the current framework looks like and why it is in urgent need of reform, you can always go back to this blog that contains our last update on the reform process. Further information on our position on the economic governance review is available in this blog post.

What are the main foreseen features of the reform? What are our takeaways?

The orientations take an important step into the right direction but do not go far enough to create an economy that works for people and fully address growing social, economic, and environmental challenges. Overall, the references to debt sustainability and GDP growth, even if it is supposed to be inclusive, remain front and centre in the orientation and there is a concern that this focus might prevail over social and environmental priorities. Illustrating this, the arbitrary debt and deficit limits are unfortunately kept (as they are set in the EU treaties) However, the 60% debt-to-GDP ratio becomes a longer-term objective, rather than a short-term debt limit which is key. In line with this, the obligation to reduce public debt by 5% per year is scrapped, which is crucial to avoid Member States needing to return to severe austerity. Generally, debt reduction becomes more gradual and country-specific, which is something that we asked for. 

Overall, the Commission suggests a model similar to the RRF. It aims to present Member States with high or medium debt levels with a country-specific multiannual fiscal adjustment path for at least four years, based on a common methodology linked to a debt sustainability analysis and dependent on Member States’ debt level. This should ensure that debt would be put on and remain on a sustainable downward path within a set period, and that the deficit would be put on and remain below the 3% of deficit-to-GDP ratio over the same period. Member States would need to submit national plans setting out how they will reduce or stabilise debt and deficit ratios based on that path. In addition, they would need to commit to reforms and investments that contribute to sustainable and inclusive growth, which is crucial and a positive development to avoid declines in needed public investment. The Commission would then assess these plans based on a common assessment framework and methodology and Member States would have to put them into practice. 

The devil will be in the detail though as to what that means for the concrete speed at which especially high-debt countries would need to reduce their debt levels and whether they will, in practice, be able to do so without choking needed investments. In addition, considering that in 2021, 15 Member States had deficit ratios > 3%, keeping the 3% threshold could risk limiting needed investments and reforms.  

It is positive that Member States can ask for a maximum 3-year extension of the debt adjustment period by committing to more reforms and investments. This is an incentive, a “carrot” for Member States. However, generally, if they don’t achieve the promised results, they face more automatic and enforced sanctions, a “stick”. The Commission set certain criteria for these reforms and investments proposed as part of a requested extension: they have to address common EU priorities, which includes, among others, the implementation of the European Pillar of Social Rights, which is welcome. We are advocating for the Commission to set earmarking for these additional reforms and investments to make sure they support different EU objectives (social, green, digital, etc.) in a balanced and mutually supportive way.  

It is also positive that the general escape clause is maintained for periods of significant economic downturn, which was crucial during the COVID-19 pandemic. It is supplemented by a country-specific clause in case of events outside of the control of Member States, such as large unforeseen natural disasters, which is also a good development. 

What is missing?

Unfortunately, the orientation does not include any do-no-significant harm principle as an assessment criterion for submitted national plans, neither from a social nor an environmental perspective. This would be important to make sure that reforms and investments do not support objectives that would harm the wellbeing of people and planet. We hope that the final reform proposal will at least highlight that national plans need to be in line and support turning set EU objectives into reality.

Regrettably, the idea of a golden rule, meaning fiscal exemptions for some categories of spending, such as social or green spending, has not been included into the proposal, as it was very contested by some Member States. However, the Commission expects the possibility to extend the debt adjustment period in exchange for more reforms and investments to have a similar impact.

The orientations also do not refer to any follow-up fund to the RRF. In recent years, we have started to see the beginning of the growing impact of climate change already. Now, we are also seeing the impact of the needed transition of our economies away from the fossil fuels we are currently so dependent on to renewable energy sources, which, in combination with Russia’s invasion of Ukraine, has worsened the pre-existing cost-of-living crisis. It is clear that a just transition to climate neutrality will not be achieved by the end of 2026, when RRF funds run out, and significant reforms and investments will be needed to address the cost-of-living crisis and achieve this transition in a socially just way. We will continue our advocacy work on making sure that such a follow-up fund for just transitions will be adopted before the end of 2026.

Next steps

Following the orientations, the Commission will engage with Member States to get them on board for this direction of travel of the reform. This might not be an easy undertaking, with some more frugal Member States opposing important aspects of this orientation. The Commission plans to put forward legislative proposals, which are currently foreseen for Q1 of 2023. This would be good news, as this would formally involve the European Parliament, which will make it easier for organised civil society to make their voices heard. Social Platform will continue engaging in this process with partners to push for strong reform that will allow Europe to turn its back on austerity for good and support a socially just transition for people and planet.