Read PDF Between Growth and Stability: The Demise and Reform of the European Unions Stability and Growth Pact

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Within this complex context, there is an urgent need for major changes in Europe. These changes have to come from the EU institutions and national governments, with European citizens, their voices and concerns at the core of the debate. The pressure it exerts on the Commission and Council is growing, led by a group of MEPs coming from different political families i. The unstable political environment in Europe and the fact that many member-states are entering into electoral campaign mode especially France, Germany, The Netherlands or faced with big challenges, such as the referendum on constitutional reform in Italy or the fragile majority of the conservative government in Spain, could either impede positive developments or trigger a new phase that drags the EU away from catastrophic austerity.

The European Left has the opportunity to foster broader alliances at the domestic level and fight for a dominant and influencing role in the upcoming elections in member-states.

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Empowering the role of the Left at regional or central level is vital for an urgently required shift of Europe towards progressive policies. Article Submission. Legal Disclosure. Privacy Policy. Dimitris Papadimoulis. Join our growing community newsletter! Thank you very much for your interest!

Now please check your email to confirm your subscription. There was an error submitting your subscription. Please try again. Materially, the impact of the Fiscal Compact might therefore be much less than hoped for by many fiscal hawks. How much is austerity stifling the euro zone? ECFR calculations indicate that for the euro area as a whole, planned consolidation for amounts to almost 1.

This means that GDP growth is dampened by at least as much as the deficit is cut.

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Reinventing Europe: Explaining the Fiscal Compact

This reasoning suggests that austerity alone explains a large part of the current European recession, and indicates that any recovery into might be extremely weak if consolidation plans are left unaltered. Austerity is also increasingly seen as self-defeating as it reduces the absolute level of GDP, thereby increasing the debt burden as measured in debt-to-GDP-ratios. After this point, it can be expected that further progress towards the medium-term-budget objective of close to balance will be pursued in a slower manner.

Another important question is whether the target of a almost balanced budget is too tight.

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Traditional golden rules usually call for a balanced budget over the cycle, excluding capital expenditure. The logic here is that investment yields return in the future, helping to service debt, and therefore should be treated differently from public transfers or public consumption. The EU rules do not make such a differentiation, and so can be seen as prescribing an overly tight fiscal policy that leaves insufficient room for investment. Empirical evidence from especially large-scale previous austerity drives shows that there are cuts to public investment, education and research and development, which may then also have a negative effect on long-term growth potential.


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The fiscal framework passed into law last year prescribes extremely harsh austerity in the near future and strongly constrained fiscal policy at least until the middle of the next decade. However, as these have already become law, it does make sense to ask for a renegotiation of the Fiscal Compact if one wants to change something in the current stance of euro area fiscal policy.

Given the limited material impact noted above, and the diplomatic complications caused by the passage of the Fiscal Compact outside the EU treaties, one might think that simply scrapping it was the easiest option. However it is not clear how such a move would now be perceived by financial markets. Pulling out of the Fiscal Compact altogether might cause a new capital flight.

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In addition, attempts to reopen the Fiscal Compact will be resisted, especially in Germany. However, while the label coined by Mr Draghi is ideal, his proposals would be insufficient to alleviate the growth-inhibiting impact of current austerity.

The Stability And Growth Pact Has Failed – Dimitris Papadimoulis

These proposals — for better and more focused use of existing EU funds, along with structural, growth-enhancing reforms — would bring in little that is new, relative to current conditions in IMF programmes. The existing EU funds would be too small to make a real impact, particularly in larger economies, and structural reforms usually take years before their positive impact can be seen. An appropriate Growth Compact would therefore have to do more, getting relevant funds of a suitable magnitude moving again in Europe. In addition to whatever can be done to activate dormant funds from cohesion funds and other EU budget lines, three main elements would be needed, all of which could be enacted without altering the Fiscal Compact:.

This could help break the downward spiral of contracting GDP, rising unemployment and rising deficits, by allowing the countries to exit recession before more austerity is applied.


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One possibility would be to give the European Investment Bank a central role in public investment financing. Under such a scheme, national governments could lease new infrastructure investment from the EIB. The EIB would borrow the necessary funds in the market and pay for construction, while the national governments would, over the time of their use, pay the EIB a user fee that covers interest rates and depreciation.

Under such a scheme, national governments could bring down their national budget deficits and debt-to-GDP-levels without having to cut investments into the future. A move towards euro-bonds or the introduction of a European debt redemption fund as recommended by the German Council of Economic Advisors would significantly lower these interest rates, and so help the countries back towards the path of economic growth.

Adding such a meaningful Growth Compact to the Fiscal Compact might provide the best way out of the current stalemate.

Countries such as Germany may be willing to sign up for it as the price for ratifying the Fiscal Compact. For their part, countries sceptical of the current austerity stance might be willing to accept the Fiscal Compact if they see that the overall package is better than the status quo especially as the Fiscal Compact is unlikely to have as large an impact as they fear.

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