MNI INTERVIEW: Robust Fiscal Rules Require EU Fiscal Capacity

A credible enforcement of the new European Union’s new fiscal rules after their initial years of operation will require the European Commission to be able to raise its own funds to mitigate the social impact of fiscal adjustment, former top Commission official Marco Buti told MNI.

While the Commission is likely to announce mandatory fiscal adjustments for up to 11 member states including France and Italy on June 19, these will require tighter fiscal retrenchment once provisions allowing greater leeway for higher interest costs cease to be of assistance after the first three years of the seven-year programmes, said Buti, an important architect of the Commission’s original proposals for a new fiscal regime as chief of staff for Economy Commissioner Paolo Gentiloni between 2019 and 2023. (See MNI: EDPs Give EU Early Test Of New Fiscal Rules-Officials)

Assembling a fiscal capacity will be the top priority for the next Commission president, likely to be Ursula von der Leyen in a second term, he said in an interview, which came after a surge in support in weekend European parliamentary elections for far-right, traditionally eurosceptic groups in the EU’s biggest member states.

“I think a situation where Brussels is seen as forcing states to make unwelcome fiscal choices and then leaving them to pick up the pieces is not politically viable. Although I agree it can’t be solved immediately,” he said.

CENTRAL FISCAL CAPACITY

Without a central EU fiscal capacity, restrictive national policies could push the eurozone towards recession, making the green and digital transitions unmanageable, said Buti, who now holds the Tommaso Padoa-Schioppa chair at the European University Institute in Florence.

While groups which have been traditionally wary of extending the EU’s role, such as France’s National Rally and Germany’s AFD did well in the European parliamentary elections, Buti said the new Commission might still be able to muster support for joint funding from centrist parties.

“Hopefully, it will prompt a greater sense of European responsibility from them than they have shown in the past,” he said, adding that it was likely the big centre-right European People’s Party would forge an alliance with the centre left and the liberals. While EPP parliamentary leader Manfred Weber has been “quite ambiguous” on that question, pressure from France ahead of its June 30 and July 7 legislative elections should rule out cooperation with the far right, Buti said.

The French elections, and the defeat for President Emmanuel Macron’s centrist forces in the European vote, have triggered a selloff of French bonds, as concern grows over the country’s growing debt.

“Since in the past France did not fear the punishment of financial markets, they disregarded the increase in debt when it came to their fiscal policy behaviour,” said Buti, noting the contrast with the behaviour of Italian governments, which he said had taken serious action to rein in fiscal excess for fear of financial market punishment.

“During the Global Financial Crisis, there was a perceived German umbrella over France, and that was enough to keep markets on check. As to the future, unless France shows seriousness on putting debt on a decreasing path, some nervousness about French debt can’t be excluded.”

EDPs

In the meantime, it is essential the Commission goes ahead with the opening of excessive deficit procedures on June 19 and the issuance of new debt sustainability analysis-based debt trajectories on June 21, he said.

“These two dates have been in the calendar for a long time, and everyone is expecting them,” he said. “Implementing the new fiscal rules is in any case key to the ongoing and gradual easing of monetary policy by the ECB. Together over time these will create a climate of trust and economic confidence, in which a serious debate on a central EU fiscal capacity can get underway.” (See MNI SOURCES: September Rate Cut In Sight For ECB)

A key moment for the path to greater integration will be the EC’s initial proposals for the next Multiannual Financial Framework post 2027, which have to be made by the end of June 2025, and which Buti said should include a successor to the EU’s EUR800 billion NextGenerationEU post-Covid recovery programme. (See MNI INTERVIEW:Any NGEU2 To Focus On Cross-Border Projects-Buti)

“Hopefully, they will find the courage to rise to the challenge when they come with proposals for the EU’s multi-year budget. As in its response to Covid, red lines must be crossed,” he said.