European economic policymakers are at a pivotal moment. Recently, the European Central Bank (ECB) Governing Council announced its tenth consecutive interest-rate hike, reflecting ongoing concerns about inflation. Simultaneously, the European Union's Economic and Financial Affairs Council has been mired in negotiations over reforms to EU fiscal rules, yet no consensus has been reached.
Adding to the uncertainty, European ministers, central bank governors, and regulators convened for their annual informal meeting to discuss economic governance and the coordination of fiscal and monetary policies. Despite these efforts, meaningful changes that Europe desperately needs remain elusive.
The aftermath of the COVID-19 crisis saw European authorities implement swift and innovative responses, significantly increasing public debt. Coupled with recent inflation surges, this has led to a resurgence of austerity debates. Some EU member states, particularly those previously hesitant about pandemic spending, are now pushing for a return to strict fiscal measures. Meanwhile, the ECB continues its hawkish stance, leaving many to wonder whether this is merely a temporary phase of reform fatigue or a permanent shift back to austerity.
The European Commission acknowledges that the current structure—consisting of one central bank and multiple fiscal authorities adhering to national fiscal rules—creates a deflationary bias. This setup places the EU at a disadvantage compared to the United States, which employs a more supportive mix of policies during crises. However, the political will to address this imbalance is conspicuously absent.
One example is the European Commission's proposal to reform EU fiscal rules. Although less stringent than the existing Stability and Growth Pact, the proposal still contains many pro-cyclical elements. This means that as economic growth weakens, the EU would face sharp fiscal consolidation. If implemented, the EU would need to increase its overall structural primary surplus by approximately 0.65% of GDP annually from 2025 to 2028. For countries like France and Italy, this requirement jumps to 1.1% and 0.9% of GDP, respectively, posing significant challenges.
As the EU navigates these turbulent economic waters, the question remains: Can Europe unify its fiscal policies to foster sustainable growth, or will it revert to old austerity measures, hindering its ability to effectively respond to future crises?
Reference(s):
cgtn.com
