Are proposed EU economic and fiscal reforms enough?

14 December 2022

The European Union’s fiscal and economic framework is going to see big revisions. However, some crucial elements remain missing. Two-thirds of government investment in the EU is carried out by sub-national governments. And yet, the EU still lacks serious requirements for the expertise of local government to be engaged when deciding how investment is prioritised or budgetary cuts are made by member states.

Many of us will have been impressed during the pandemic by homemade videos of elaborate chain reactions – a basketball rolling onto a fan-switch which blows a marble into a line of dominoes, and so on. What we don’t see is the hundreds of attempts to get these series of reactions right. We cannot rely in urgent matters on the serendipity of a chain reaction. If cities are to succeed in bringing about the just transition and hitting climate targets, it is essential to engage them directly in the process.

Even in cases where there are explicit European Commission guidelines for national governments to involve local authorities in their planning, as in the case of the National Recovery and Resilience Plans for post-Covid recovery, many governments have failed to carry out proper consultation.

Growth focus

The proposed reforms will see a welcome shift from a focus on fiscal discipline to one on sustainable growth through strategic investment. Thanks to the unfolding of crisis after crisis in the last two decades, many of the old rules on spending have not actually been applied in years, and the European Commission has recognised the need for a more realistic approach to lowering high public debt to GDP ratios.

In conformity with Eurocities’ recommendations, the new communication portends a shift away from the short-termism of austerity policies. Instead, it signals the ‘counter-cyclical’ approach that Europe’s cities have advocated for, saving when times are good in order to spend more freely when the economy is in need of stimulation.

Social gains

There is also to be a greater focus on social infrastructure, in acknowledgement of the investment gap to the tune of up to €150 billion in this domain thanks to the Covid pandemic. Health care, education and affordable housing have been recognised as areas where Europe needs more resilience, and therefore more long-term investment.

“There has been a neglect of the positive economic stimulus that such investments can bring,” says Eurocities Economic Development expert Denisa Naidin, “but now we’re seeing Europe acknowledge that, as well as the simple fact that a just green and digital transition cannot be successful without them.”

“We’ve also long said that fiscal rigidity has become a stumbling block for much-needed long-term investment, so it’s good to see an emphasis on higher public investment for better resilience,” Naidin says, “but we’re still strongly advocating for a green golden rule, and its absence is a disappointing signal to those hoping to achieve EU climate targets locally.”

A golden rule

The proposed ‘golden rule’ to achieve a fair green transition would see long-term public investment towards achieving environmental sustainability through economically fair and socially just means excluded in debt calculations. In other words, such investments would not be limited by EU regulations in the same way that other kinds of debt are.

Instead, the Commission is looking at a net expenditure rule focusing on the medium term. An indicator related to this will simplify the rules and trigger a shift away from short-term thinking. New national medium-term plans will ensure debt is brought into a sustainable path by the end of four years and will compel member states to explicitly state their public investment priorities and reform commitments. However, Eurocities argues, it does not go far enough, as the plans do not involve all relevant public investors and are not properly targeted towards our digital and climate goals.

The essential thing is that cities are meaningfully involved in formulating these plans, as 70% of all investment happens at sub-national level. National budgetary and investment plans should include local priorities to bring plans closer to people. Moreover, the plans need to be better aligned with our common European goals on climate neutrality, sustainable energy and a just digital transition.

“The main problem remains,” Naidin explains, “that although the European Commission recognises the need for higher public investment in a just transition, there are no conditions attached to national plans, or even spending targets set. We won’t manage to reach our goals if the types of investment that we need to make are not embedded in the rules.”

Robust, if not intelligent

The proposed reform should facilitate effective economic surveillance, anchored in a common, robust framework. However, it is blind to expenditure and investment trends, investment gaps, and the potential for returns on investment. Eurocities advocates for a more intelligent and targeted approach that is coordinated through all levels of government, local, national and European, working together.

Mayors have responded to the proposals with an open letter stating five key demands. In the meantime, Eurocities will continue to work with the European Commission to bring about an economic framework that works for Europe’s people and our planet.