It is said that generals are always fighting the last war. Europe’s political leaders must rise to today’s challenges.
The horrific war on Ukraine launched by the Russian president, Vladimir Putin, has created a crisis which demands of Europeans soul-searching as well as solidarity. It is a process that has been three decades in the making.
The Ukraine invasion coincided with the 30th anniversary of the signing of the Maastricht treaty, which laid the foundation for the euro. In the late 1990s, the political momentum from that breakthrough led to the Stability and Growth Pact (SGP), a set of procedures and rules requiring national governments to keep public debt below 60 per cent of gross domestic product and annual fiscal deficits below 3 per cent of GDP. Such budget discipline was considered necessary so that everyone could benefit from the single currency while avoiding its pitfalls.
Yet, after a favourable macroeconomic period in the early 2000s, the 2008 global financial crisis and the ensuing eurozone debt crisis brought the single currency’s honeymoon to an end. Initially celebrated as a formidable political creation, the euro came to be seen as an instrument of illegitimate coercion. Inappropriate and excessive fiscal austerity at the height of the crisis stifled the recovery and inflicted lasting social and political damage.
By the time Covid-19 arrived, the European Union had learnt from these mistakes. In March 2020, the European Commission activated the SGP’s ‘escape clause’, suspending the budget rules and allowing member states to support their economies fully.
More importantly, the EU agreed a recovery plan (NextGenerationEU) to be financed via mutualised debt—breaking a longstanding taboo which had blocked deeper European integration. For the first time in its history, the union can now borrow in its own name on financial markets to support national economies affected by a crisis, and to accelerate the green and digital transitions.
Given this experience, returning to the pre-pandemic criteria of the SGP would be a serious mistake. There would once more be a collapse in public investment, as the eurozone crisis precipitated. More fundamentally, the pact’s criteria were established in and for a different macroeconomic context.
Back then, monetary policy was considered the only appropriate discretionary instrument of macroeconomic stabilisation. Since the start of the pandemic, however, it has been clear that fiscal policy must play a leading role in driving the recovery—maintaining solidarity, supporting health and social systems and so on.
The pandemic has also forced us to rethink our excessive dependence on third countries, particularly China, in strategic areas. And now, dramatic climate-driven events and Russia’s war on Ukraine have sharpened the realisation that we must invest even more in solidarity, resilience and strategic autonomy, particularly when it comes to energy production and supply.
There will be much debate in the coming weeks about how to do this. In our view, one of the most effective strategies is to transform the SGP into a Solidarity and Resilience Pact. This would allow us to preserve financial stability while encouraging member states to contribute to other common goods, such as environmental and social sustainability, digitalisation and strategic autonomy.
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In our vision of Europe’s future, member states’ fiscal trajectories would be defined according to their specific economic and social circumstances. The large additional debts incurred during the Covid-19 crisis should not become justifications for limiting governments’ ability to respond to further crises.
The focus must be on long-term debt sustainability—not mechanical adherence to some arbitrary threshold. There should also be a transition period between the deactivation of the SGP’s escape clause and the introduction of adjusted rules.
At the national level, the new rulebook should allow for differential treatment across member states to support the twin ecological and digital transitions. At the European level, we must equip the eurozone and the EU with real budgetary capacity, so that the union’s policy-makers can react quickly to crises and manage investments in public goods related to common challenges.
In this respect, we support proposals to make NextGenerationEU a permanent, long-term, joint-investment fund. We also call for the establishment of a permanent European unemployment-reinsurance scheme to support national unemployment-insurance systems in the event of a crisis, following the model of the pandemic-era Support to mitigate Unemployment Risks in an Emergency (SURE) programme. Financing these initiatives will also require further thinking on the EU’s ‘own resources’; we welcome that debate.
Finally, social cohesion must be put on an equal footing with fiscal stability. This can be achieved by identifying social imbalances within member states and by supporting the investments needed to uphold all the principles enshrined in the European Pillar of Social Rights.
We can no longer afford to think about the future using concepts and categories from the past. In today’s increasingly uncertain geopolitical and economic environment, Europe needs a Solidarity and Resilience Pact to insure itself against future shocks and to lay the foundation for a socially and ecologically sustainable society.
Thirty years after Maastricht, we need to rethink European-level economic governance to support a more autonomous, social and ecological vision of Europe. That is the only way to guarantee our prosperity, social cohesion and security in the long term.