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Leaders of France and Italy Call for Reform of EU Fiscal Rules

Posted on Dec. 27, 2021

The leaders of two of the EU’s largest economies want the EU’s fiscal rules to be reformed to cope with the economic challenges of the pandemic without resorting to higher taxes and spending cuts.

In a December 23 op-ed published in the Financial Times, Italian Prime Minister Mario Draghi and French President Emmanuel Macron implored the EU to create and implement coordinated structural reforms that would “curb recurrent public spending” while targeting investments in research, infrastructure, digitization, and defense that aim to reduce debt levels in the long term.

“We will need a framework that is credible, transparent, and capable of contributing to our collective ambition for a stronger, more sustainable and fairer Europe,” Draghi and Macron wrote. “There is no doubt that we must bring down our levels of indebtedness. But we cannot expect to do this through higher taxes or unsustainable cuts in social spending, nor can we choke off growth through unviable fiscal adjustment.”

The leaders’ comments came a day after the European Commission published three revenue-raising proposals, including a package of new own resources that would be used to pay down the €800 billion capital market loan used to fund the block’s coronavirus recovery package, known as NextGenerationEU. According to commission estimates, the three proposed direct revenue sources — a share of revenues from an expanded EU emissions trading system, a carbon border adjustment mechanism, and the taxation of reallocated profits from large multinationals — would generate around €17 billion per year once fully operational, in roughly 2026.

Noting that the commission relaunched a consultation October 19 on the future of the EU’s fiscal rules, Draghi and Macron said the bloc should consider proposals that allow spending flexibility, preserve sovereignty, and prioritize debt used to finance long-term investments that target growth and future generations’ welfare.

The commission first opened a review of the EU’s economic governance framework in February 2020, but the review was suspended so the commission could focus on its response to the COVID-19 pandemic.

Draghi and Macron wrote that the EU’s fiscal rules have needed reform since before the pandemic.

“They are too obscure and excessively complex,” the leaders wrote. “They constrained the actions of governments during crises and overburdened monetary policy. They also failed to provide incentives for prioritizing key public spending for the future and for our sovereignty, including public investment.”

France, which will take over the EU Council presidency in January 2022, plans to develop “a shared comprehensive strategy” on economic governance during its tenure, according to the op-ed. The French presidency also aims to broker EU agreements on the carbon border adjustment mechanism and implementation of the OECD agreement on minimum taxation.

EU economies have spent almost €1.8 trillion on public investments during the COVID-19 pandemic, and EU leaders have pledged another €2.3 trillion in the long-term budget for 2021-2027, recovery fund, and emergency EU pandemic programs.

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