The European Stability Mechanism (ESM) was the first European institution to present its proposal for fiscal reform last Monday in the dialogue that officially began on 19 October.
The proposal provides for three elements. First, the increase of the permissible debt limit of a member country from 60% of GDP to 100% of GDP while maintaining the rule for reducing the excess debt by one twentieth (5%) per year until the debt returns to 100%. Debt reduction will be ensured by achieving the corresponding primary surpluses. In the event of a recession or investment gap, the European Commission will be able to suspend its debt reduction obligation.
Secondly, maintaining the 3% threshold for the budget deficit, which is generally considered to work positively for fiscal stability.
Third, it provides for a cap on public spending growth based on the GDP growth trend for member countries with debt less than 100% of GDP or for countries with higher debt, in case they are in recession or have an investment gap. Expenditure will exclude EU funding for investment co-financing, one-off costs and the impact of automatic stabilizers.
The ESM proposal is in principle positive for Greece, as it reduces the distance that its debt has to cover, which increased due to the pandemic of over 200% of GDP, while the possibility of exemptions from the adjustment when there is investment gap, which is also important in Greece.
The changes to the financial rules proposed by the ESM are based on three assumptions. Firstly, that after the recent increase in the debt level of EU countries due to the coronavirus, the debt limit at 60% of GDP is no longer realistic, because it would require very high primary surpluses for very long periods of time. Secondly, that lowering interest rates makes it possible to finance higher debt.
Although interest rates are expected to rise from their current very low levels, they are expected to continue to be lower than they were 25-30 years ago when the Maastricht Treaty fiscal rules were set. Thirdly, that all EU countries will have increased needs for public investment, especially in the transition to a green economy.
In other words, the aim is not to discourage public investment with fiscal rules, as has been the case in the past. In its report, the ESM states: “After the global financial crisis, efforts to comply with fiscal rules may have discouraged public investment. The financial crisis and the consequent market pressure have led to cuts in public investment in many developed economies. The decline in public investment has been significant, especially in countries that have been in economic adjustment programs, such as Greece, Ireland and Portugal. “After the pandemic, countries will have to address investment gaps and secure additional funding to achieve goals set by European initiatives as well as boost growth.”
The European Commission predicts that the EU will need new investments of 260 billion euros per year or about 1.5% of GDP in 2018 to achieve the targets of reducing pollution by 55% by 2030, while the European Investment Bank estimates that the total gap for infrastructure investment in the EU will reach € 155 billion a year to achieve these goals. Accordingly, there is a gap of 1% of EU GDP in information and communication technology.
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