“Spend and spend and spend”, the European recipe for overcoming the nightmare of the coronavirus crisis

The Europe of adjustments, that of the post-2008 crisis, will be slow to return. The coronavirus pandemic and its correlate of economic destruction have changed the bloc’s fiscal and economic policies. What seemed like an exception of months can become a solution at least in the medium term. In the long run, as Keynes said, all are dead.

It all started a year ago. Faced with the predictable and deep economic crisis looming due to health measures to stop the spread of the first wave of the virus, the European Commission has unilaterally decided to activate the so-called “ escape clause ” of the Stability Pact and growth. In practice, it has stopped applying this pact and monitoring deficit and debt levels. The message coming out of Brussels was clear: “Visitors!”.

Massive public spending to support economies that heralded collapse, companies that threatened to close one after the other and millions of workers who could be seen in the streets. Behind, the lifeguard of the European Central Bank, which with its debt purchases keeps country risk at bay to the point that the entire euro zone is financed at historically low rates.

Months have passed and the European Commission has officially communicated by letter to the ministers of economy and finance that in 2021, the “ safeguard clause ” will continue to be activated and therefore I still wouldn’t look at a lot of deficit or public debt. No EU country currently respects these limits, which the Stability and Growth Pact sets at 3% of the public deficit and 60% of the public debt. The latest forecasts from Brussels suggest that the euro zone will close 2021 with a deficit of 6% and public debt of 100%.

Some governments wanted to open the debate on what to do in 2022 but the German ordered the braking. With the support of France, Italy and Spain, Germany has called for this debate to be put to rest until it knows how European economies are developing in the coming months and when. rhythm the population is vaccinated. It will be discussed in May (when it is due), was the message from German Minister Olaf Scholz. The European Commission will make its recommendation on Wednesday, but everything indicates that the “escape clause” will remain activated.

Expenses and Debt

The German irruption was the signal that the European Commission had to accept what France had been asking for for months: which is not reapplied the Stability and Growth Pact without prior reform. European countries will emerge from the pandemic with public deficit and public debt rates to which, if the rules of the pact are applied, it would be necessary to face a corrective in the form of adjustment which would sink the economies.

This French message, which Italy and Spain support, has been the message of the European Commission since Friday. At a conference in Brussels, European Commissioner for the Economy, Italy’s Paolo Gentiloni, said fiscal rules must be adjusted to allow countries to spend more to foster growth and fully emerge from the crisis. Gentiloni believes that a new framework is needed that takes into account both public spending in a different way as the composition of the debt.

Commissioner stresses that the pact should be reformed so as not to treat current spending and spending on infrastructure or education on an equal footing and that this should be taken into account in any analysis on debt sustainability . Gentiloni admits that governments should, as soon as they grow strongly, continue to reduce deficits and debt, but that they should do so with “A credible mechanism“It does not imply adjustments leading to another economic contraction.

Another of the possible reforms would consist in orienting the pact more on the economic situation in the medium and long term and not only on the deficit and debt data for a given year. Gentiloni also aims to separate “good and bad debt”. What is the good? According to the commissioner, that intended to finance “research, education, infrastructure or health care”. The bad? The one that goes to current expenses or does not improve competitiveness and production capacity.

The Brussels forecasts consider that the European country which will progress the most this year will be Spain with 5.6% while the average for the euro zone will be 3.8%. Clearly insufficient to recoup what was lost in 2020, when the eurozone fell 6.8%, its second largest drop on record after 2.9% in 2009, the year after the great financial collapse.

The debate on the need to reform the Stability and Growth Pact predates the pandemic, but it has strengthened advocates for this reform, which seems already accepted by the European Commission. In Brussels, for years, it has been quietly said that the pact, in its current conception, does not promote stability or growth.

PB