Fiscal discipline, but at the same time an emphasis on defense, new technologies, the “green transition”… It is not easy for Europe of the “27” to respond to all of this. The “European Green Deal” with its declared goal of making the EU “climate neutral” by 2050 was the biggest and most ambitious plan of the outgoing European Commission under Ursula von der Leyen. However, in order to implement it, investments of one trillion euros per year are required. Even in fat cow seasons this amount would be huge. In today’s times it becomes unthinkable, when in fact increased expenses are required for defense or ensuring the energy supply.

Who will pay for all this?Many European countries are facing a serious debt problem and are recording increased deficits in the state budget. For the 20 member states of the Eurozone, the room for maneuver is even more limited, as the Stability Pact imposes clear rules: In theory, the public debt should not exceed 60% of the Gross National Product (GDP), while the budget deficit should is limited to 3%. Fiscal discipline rules were suspended during the pandemic, but this year they are back in force.

This does not change even with the recently finalized revision of the Stability Pact, after months of negotiations. The new element is that the rules provide for more flexibility, allowing each country to do its own negotiation with the EU to consolidate its public finances. Speaking at the Brussels Economic Forum in May, Greece’s Finance Minister Kostis Hatzidakis called it a “good” and typically European compromise, but warned that, in the final analysis, “markets are the ones that dictate fiscal prudence. Anyone who ignores this will eventually be taught it, as happened in the last decade with us Greeks.”

Exemption for certain categories of expenses?

However, many feel that the times are not conducive to fiscal restraint. Thea Zark, representative of the European Trade Union Confederation (ETUC) in Brussels, points out that investment to tackle climate change cannot be equated with consumer spending and warns that “when we impose restrictions instead of facilitating the financing of necessary investments, it is as if we consider the European Green Deal an issue of minor importance”.

Similar debates are taking place in many EU member states, with a constant demand to exempt specific categories of spending from the rules of fiscal discipline, from defense and reforming the pension system to the digitization of the economy. What should happen?

A reasonable alternative to relieve the public sector would be to increase private investment. But while Europe is a “giant” in terms of its population (450 million) or its GDP (17 trillion euros), it remains a “dwarf” in the mobilization of private capital. “It’s a real shame that we still don’t have a single capital market in Europe,” points out Polish MEP and former Commissioner Danuta Hübner. She explains that “in the US the capital market is twice as large as in the EU” and this is because each European country insists on its own rules, from savings to taxation.

In fact, the Commissioner for Economic Affairs, Paolo Gentiloni, points out that “in his public statements, no one in Europe would express his opposition to a single capital market, but when finance ministers meet it proves to be extremely difficult to achieve the slightest progress”.

“No” of the North to the assumption of common debt

Another source of financing would be the assumption of common debt by all member states. The recipe was tested for the first time during the pandemic. Now the Economic Affairs Commissioner is bringing back the same recipe, but in a different package. The goal is no longer “euro-bonds”, but “common tools to achieve common goals”. However, countries such as Germany, the Netherlands and Finland express their opposition to an assumption of joint debt. And this is because they are afraid of losing the high credit rating they have secured so far from the rating agencies.

Any other idea?Julia Caillet, professor of Economics at the University of Science Po in Paris, suggests that the decision-makers should address the highest incomes, the “rich” and proposes, very specifically, the imposition of a wealth tax directly by the EU and in all its countries EU, because only in this way will the necessary collections be ensured. “Of course there are many who will try not to pay this tax,” Caillet tells DW. “But if the price for that choice is to lose their European citizenship, I think they will reconsider.”

They could also cover a significant part of the costs of combating climate change. As the French economist says, “a series of studies, such as the one published by the World Inequality Lab, show that the rich burden the environment much more than the poor, as they own bigger houses, polluting cars, luxury yachts or private jets, and all of this causes greater Pollutants”.

By imposing an environmental tax, which would increase progressively according to the environmental footprint, the prosperous could contribute more fairly to the “green transition”, in the same way that they are reasonably subject to higher tax rates when their incomes rise.

Edited by: Yiannis Papadimitriou