Europe is facing a new era of fiscal adjustment

Europe is preparing to tighten its belt. In recent years, public spending has become the safety net that cushioned the fall and prevented a disaster larger than the pandemic and Russia’s invasion of Ukraine. But countries are already starting to turn off the tap. The deficit in the first quarter of the year in the euro area was 3.2%. This trend will continue if countries comply with the commitment made by their finance ministers in the last European Community: “We will achieve the necessary restrictive global fiscal orientation in the euro area by 2024”. In the same week, the International Monetary Fund (IMF) called for this course to be followed.

Germany, the great economy of the continent, wanted to lead the way by cutting 36,000 million in its budget project Next year. But it is not at all clear that other countries will want to follow this rhythm. Settings, yes. Austerity such as was applied in the last decade, no. The European Commission did not raise the latter in its documents. In March, he rescinded the clause that released the financial corset From the Stability Pact so that countries can save the economy from the pandemic. A clear sign of the changing times. But this is not a 180-degree turn. In the spring budget recommendations, the executive branch of society does not speak of austerity. And And his proposal to reform fiscal rules in the medium term does not move in this direction either..

“There will be a change in the cycle. Years of fiscal consolidation are coming. Since the pandemic, the level of debt has increased. Now is the time to reconsider what has been done so far, because the debt has increased, “says economist Carlos Martínez Mongay. But this, he explains, has not been what has been seen in the past decade. The figures back up what this earlier position of the commission illustrates: the monetary district’s public debt reached an amount equivalent to 84% of GDP, and is now at 91.2%, when the economy regained its long-lost momentum.

The same description of what will happen was developed by the Italian Cinzia Alcidi, Research Director Think tank brusselsense CEPS: “The EU economy has done well, certainly better than many expected. There is no doubt that the recovery fund and national fiscal policy have played an important role. Such as shocks As the storms calm, politics should become normal. This is also crucial considering the potential for further clashes.

The European executive’s commitment is to initiate an adjustment path that combines debt reduction – deficits have lost their prominent place in analyzes in recent years – especially for the most indebted countries (Greece, Italy, Portugal, Spain, France …), with the preservation of public investment so as not to lose weight in the double green and digital transformation. how? Separate extraordinary public aid from electricity and allocate that money to debt reduction. To maintain the investment, he relies on the billions coming in to capital through the recovery fund.

This is also the commitment of Judith Arnal, Senior Research Fellow at the Elcano Royal Institute. It also highlights that at the worst of the pandemic, debt reached 97% of GDP and is now declining: “This trend must continue and underpin credible fiscal consolidation plans over the medium term. Fiscal space is essential to be able to rely on fiscal margins in the face of possible new adverse macrofiscal disruptions.” This adjustment must take into account “the current geopolitical environment and be compatible with the important investments, in the areas of energy, environment and digital, that the European Union has to make,” adds the Professor of Master’s Degree in Banking Sciences at the University of Navarra.

This analysis is common to many institutions. The European Central Bank (ECB), for example, recently issued a warning That public investment and debt reduction are necessary at the same time. It occurs by increasing taxes or cutting other spending policies, especially in member states with a high level of debt. The position of the European Financial Council, headed by Danish veteran Niels Thijsen, is similar, albeit with tougher language. “The favorable economic environment prompts the Council to consider that restrictive fiscal policy is appropriate in 2024. In addition, lower inflation and higher interest rates will reduce confidence in public finances.”

However, combining those adjustments required to reduce debt while preserving public investment does not look easy. In the same report in which he warned of the need for amendments, it was said that the recovery fund (nearly 800 thousand million euros between 2021 and 2026) is not enough. More is needed. The European Commission itself in its latest prospective report He gives a figure for those who are hard to imagine: the double green and digital transformation requires 750,000 million annual investments in the European Union. “Most of this should come from the private sector, but member state budgets will play an important role,” he adds.

And here the analyzes begin to appear, which greatly doubt the possibility of detonating (investment) and absorbing (debt reduction) at the same time. The position of the European Commission is very wrong. It is primitive thinking and a pre-scientific attitude. There is no problem if the debt growth is used for productive investments. As in the private sector, we must analyze both the assets and liabilities of government,” he attacked forcefully by Paul de Grauwe, professor of economic policy at the London School of Economics. He agrees that it is time to end extraordinary aid for the energy crisis, but that money should not go to debt reduction. “Public investment has a higher multiplier effect on GDP than transfers. [ayudas aprobadas por la crisis]. He stressed the need to end the subsidy system and increase investment.

This respected Belgian economist has already been one of the most critical voices of austerity policies of the past decade and now maintains a similar analysis from the authority that has warned against mistakes in the past: “German budget cuts are a mistake. Germany needs public investment, its stock of public capital is declining.” Again, unlike the Commission, he does not think it is necessary to differentiate between countries that are more or less indebted or that the rise in interest rates last year, which made bond issues more expensive, is a problem: “Germany pays 2.4%. is this too much ?! Belgium pays 3.1%. is this too much ?! “If we don’t invest, we will lose competitiveness with respect to China and the United States. China is investing heavily. They don’t care about 3% deficit or 60% debt.” [referentes fiscales del Pacto de Estabilidad] And this nonsense,” he lets out in exasperation.

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