Austerity 2.0: Europe’s March of Folly?

Europe is about to stage its own “March of Folly”: new budget rules threaten to make the investments we desperately need impossible to protect our future prosperity and well-being.

To confront the Covid pandemic and the energy crisis, European budget rules have been temporarily frozen. Member states are now fully negotiating the new rules. These arise from the realization that the old framework after the financial crisis led to a lost decade, characterized by economic stagnation and lack of investment.

However, it remains just tinkering on the margins: the strict Maastricht standards have been maintained. Member states with a budget deficit of more than 3% of GDP or government debt of more than 60% will still have to make significant cuts. While geopolitical rivals such as the United States, China, Korea and Japan are investing heavily in (green) industrial policy, Europe’s fetishism of numbers and quantitative budget targets threatens to trap it back into a procyclical policy in which innovation, economic growth and climate policy are the main victims. .

However, government debt is an ingenious tool. If the government is not allowed to go into the red, spending on health care, education, justice and public transportation, for example, will have to move with the ups and downs of the economic cycle. If the government were not allowed to take on debt, it would not be able to invest today in projects that drive economic growth, innovation and prosperity, and thus pay for itself. Without government debt, there is no support for citizens and businesses when they need it most, in times of economic crisis.

Once again, rules threaten to overturn means and ends. The crucial question in policy evaluation is not whether the budget meets the arbitrarily set Maastricht criteria. Whether budget policy brings the goals society has set for itself closer, or puts them further out of reach. For example, the lack of green investments in the past makes additional government spending to avoid the climate crisis inevitable today.

The past decade has also taught us that blind austerity is not a successful debt-reduction strategy. On the contrary, as the International Monetary Fund now recognizes. This raises a pertinent question: If a unilateral focus on the 3% limit makes much-needed investments impossible, slows economic growth, and does not help reduce debt, why is Europe once again choosing rules that make brutal cuts inevitable?

The key here is to find a balance between budget discipline and budget expansion, where the risk of spending too much is balanced against the risk of spending too little. Especially when we take into account that we will have to invest at least 1% of GDP every year in the coming years to finance the green transition. Insanity is doing the same thing over and over again and expecting different results. Perhaps we should now take a different path, instead of forcing Member States to cut off their arm based on unfounded target numbers?