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Europe is ready to shed its fiscal straitjacket 

Mujtaba Rahman is the head of Eurasia Group’s Europe practice and the author of POLITICO’s Beyond the Bubble column. He tweets at @Mij_Europe. 

There is little doubt that 2022 is going to be a very important year in the European Union’s economic debate, a year brimming with potential and possibility — particularly when it comes to the bloc’s ability to spend. 

The EU’s suspended fiscal rule book, the Stability and Growth Pact, is due to come back into force next year, but its rules are being reviewed to make them better suited to the EU’s post-pandemic realities and future challenges. And while some members would like to go back to the old rules, with only a few tweaks here and there, the political stars in Europe may be aligning in such a way that could make bolder reform possible, if not in the short then possibly the longer term.  

To begin with, French President Emmanuel Macron has decided to make the EU a centerpiece of his reelection campaign. Largely aimed at highlighting the difference between his more thoughtful ideas on Europe, as opposed to his most serious competitor Valérie Pécresse’s shallower ones, this also means he will push for reform under France’s presidency of the Council of the EU in the first six months of this year. 

Elsewhere in Europe, the Netherlands’ new Minister of Finance Sigrid Kaag hails from the pro-EU D66 party, which will, at a minimum, change the tone of the Dutch government on fiscal issues. It’s also becoming more apparent that the team around Germany’s new Chancellor Olaf Scholz is likely to exert more influence than the liberal Free Democratic Party’s Christian Lindner in the finance ministry. Mario Draghi’s likely continuation as Italian prime minister will provide another important voice in this debate — as his recent opinion piece with Macron demonstrates. 

The fertile ground set by the EU’s top leadership aside, the bloc’s economic context has also created more political space for fiscal reform: Many EU capitals are now questioning how they can achieve their “net-zero” carbon emissions targets without more fiscal space to maneuver. And several leaders were quite outspoken about the EU’s lack of instruments to manage spiraling energy prices, with several pushing for more fiscal transfers at their summit in December. 

European Commissioner Paolo Gentiloni, the architect of reform to Europe’s fiscal rules, wants to achieve a broad consensus with political backing from EU leaders. But this will take time. A first discussion among leaders will presumably take place at an additional European Council being called by Macron on March 10-11. The Commission is then likely to offer guidance in mid-April, providing clues about where the new rules are heading. It will then table its final proposal in June, hoping to win endorsement by leaders at their European Council on June 23-24 — even if actual legislative proposals are unlikely before the end of the year. 

Senior EU officials believe this two-step process will offer a useful interim step in negotiations, providing clarity to EU capitals in April about their budgets for 2023, while also serving as a sounding board for the new rules the Commission hopes to formalize in June. 

The overhaul will at best be evolutionary rather than revolutionary, but its impact should not be understated. While the limits enshrined in the treaties — countries are not supposed to run budget deficits higher than 3 percent of GDP or rack up debts in excess of 60 percent of GDP — cannot be touched, there’s plenty that can be done to make it easier to spend.

The most likely changes remain more lenient allowances for countries climbing out of debt, as well as more exceptions for public spending — in areas like green infrastructure or digitization — that wouldn’t count toward the deficit limits. It is also possible that the basis for opening and closing so-called Excessive Deficit Procedures (EDPs) will be modified. 

There are, however, a few things that could still throw a wrench into these developments. 

Upcoming elections in Italy and France will be key to how this fiscal debate evolves — though a surprise outcome in either country looks increasingly unlikely. If Draghi were to move to the presidency, it could destabilize Italy’s governing coalition, and even result in an early election that the far right would then be well placed to win. It’s for this very reason that a majority of MPs will likely opt to keep Draghi where he is — at least until the end of his mandate in 2023. 

France’s election could, in theory, upset the country’s postwar consensus and destabilize the EU, but Macron’s reelection also remains most likely. And if he were to fall, his replacement would almost certainly be Pécresse, who would broadly stay on the same course on the EU, foreign affairs and domestic reforms.  

Over the longer term, Gentiloni is in favor of a permanent EU recovery fund or fiscal capacity, alongside the likes of both Macron and Draghi, but this debate is still premature. The NextGenerationEU’s recovery fund is only due to dole out its first disbursements based on actual reform implementation this year. Pushing for a permanent fund in these circumstances would likely aggravate fiscally conservative northern European countries. 

Still, when it comes to European fiscal policy, the ground is certainly shifting. Barring an unexpected political earthquake, we can expect a productive year for reforming Europe’s outdated fiscal institutions.

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