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As demonstrated by the tense discussions at last week’s summit regarding Ukraine, the European Union is confronted with difficult and expensive obstacles in the foreseeable future. The agreement to initiate negotiations for membership with Kyiv was a positive confirmation of ongoing unity, as well as an acknowledgment that the security of Europe is closely linked to Ukraine’s efforts to resist Vladimir Putin’s aggressive goals. However, deliberations about a potential aid package worth £50bn have been delayed until the new year due to Viktor Orbán’s obstructionist tactics in Brussels.

In the future, a contemporary version of the Marshall plan will be needed to rebuild a devastated country. This will be a costly endeavor. Similarly, reaching the goal of making Europe the first climate-neutral continent by 2050 will demand a significant infusion of public money. According to the European Commission, approximately €700bn per year will need to be allocated to meet the EU’s environmental objectives. Maintaining this level of fiscal strength will be challenging once the EU’s Covid recovery fund expires in 2026.

Transitioning to a sustainable economy will involve significant investments in training and developing new skills. The digitization of the EU economy, crucial for staying competitive in the future, will also come with substantial financial costs. These challenges must be tackled while also facing stagnant economic growth and a rising cost of living, which has contributed to the emergence of radical right-wing parties.

In this challenging situation, it is necessary to have a strong economic plan that is suitable for the current times. This plan should prioritize public investment. However, the EU plans to revert back to strict national spending guidelines in 2024, which were temporarily suspended in 2020 due to the pandemic. Discussions are underway to reintroduce a revised version of fiscal rules that restrict member states’ debt to 60% of their GDP and annual budget deficits to 3%.

This mistaken drive to go back to the austere principles of the status quo ante is being led by Germany’s finance minister, Christian Lindner. Ironically, Germany’s Social Democrat-led coalition government itself fell foul of a recent debt ruling by the country’s constitutional court, which vetoed the diversion of unspent funds borrowed during the pandemic into an off-budget climate emergency fund. But Mr Lindner, backed by other “frugal” member states, is nevertheless doubling down on his calls for a return to pan-European fiscal consolidation when a far more expansive approach is required.

The potential changes to fiscal rules currently under discussion could potentially provide more leeway in addressing national debt and deficits. However, there is a concern that the EU may make the same mistake as in the early 2010s, where mandated austerity following a financial crisis further worsened the situation. A study conducted by the New Economics Foundation found that if the deficit limit of 3% were to be reinstated, only four member states would have enough financial flexibility to meet environmental goals in line with the 1.5C global warming target.

Brussels has shown the influential impact of public finance during extraordinary circumstances by devising innovative plans like the Covid recovery fund. As we face a difficult future, it is crucial to acknowledge that investing in the state at a domestic level is crucial for future success. The upcoming years will be critical in addressing issues such as security, transitioning to a greener economy, and rebuilding growth. Turning to failed strategies of austerity would be a detrimental move in the opposite direction.

Source: theguardian.com