Is Europe's new economic governance losing its marbles?

When people talk about the European Union, they often associate it with the existence of strict fiscal discipline of public accounts and the presence of certain benchmarks (rectius indicators or numerical parameters) that all member states are obliged to respect. European law is, in fact, more characterized by an economicist logic than state models, and the field in which this approach is most evident is precisely European economic governance, aka the Stability Pact.

Criticisms of the old Stability Pact have been many and have come from different parts of academic and political thought. Prominent among them are those of: (1) pro-cyclical nature; (2) lack of democracy; (3) excessive complexity of the regulatory framework. More generally, there has been talk of numerical indicators being used as real, unbreakable fiscal rules, an expression of a disciplinary model of economic austerity and fiscal constitutionalism. All this has had the effect of weakening the spending capacity of European states and gradually dismantling welfare models, including the financing of essential public services such as health care, public education and the fight against social inequality. This has been the rule until at least the past decade.

However, the window of the pandemic crisis opened with the obligatory choice to suspend the application of the old Stability Pact for three years (2020-2023), thus allowing member states to use the debt lever to finance the already weak and infirm national social protection models, put to the test by the health emergency. This was followed by the adoption of the Next Generation Eu, which broke the taboo of common supranational borrowing and expanded the investment margins of states. Was this the dawning of a new season for the European Union? It seems not to date, given the close connection between these interventions and the pandemic emergency and their unlikely stabilization for the future.

In the meantime, the work site for reforming fiscal governance, which has been widely acknowledged as no longer able to meet the needs of the different stage of the integration process, has begun. Will the new Stability Pact have finally overcome the old managerial logic of fiscal discipline? It started with the European Commission's proposal, which presented the novelty of overcoming the one size fits all principle and constructing an individualized debt relief response for each member state. The stated goal was to leave behind, with the logic of medium-term plans (4 years, extendable to 7), the automatic application of fiscal rules. A compromise of a different kind was reached, at the urging of frugal states such as Germany and the Netherlands, which reintroduced the imposition of binding numerical indicators of a pro-cyclical nature, with the aim of setting a “certain” return to the public debt parabola and removing political discretion from the Commission.

On the one hand, therefore, the Commission's proposal seemed to open up a scenario of greater flexibility and an individualized type of debt sustainability assessment based on econometric standards of judgment (the Debt Sustainability Analysis). On the other hand, with the changes wanted primarily by Germany and the Netherlands, the fiscal policy margins of the states were in fact narrowed and the logic introjected in the old Stability Pact was reproduced, centered on numbers that are imposed as normative rules of a fiscal nature (e.g., debt reduction of 1 percent per year for countries that exceed the 60 percent debt-to-GDP ratio, deficit reduction of 0.5 percent per year if it exceeds the 3 percent ceiling). Are we facing an ameliorative advance, as some argued, or, rather, have the two incompatible logics pursued by the Commission and the frugal states produced a contradictory and negative outcome?

The answer seems to be the latter, even taking for good the glass-half-full logic. This is evident both when looking at this reform in its internal side of coherence between the logic pursued by the European actors themselves, and in the external side, opening up for reflection that focuses on the broader horizon of the post-pandemic European economic order.

From the internal perspective, in fact, one of two: either the line of differentiation and construction of a “tailor-made suit” for each individual country is pursued, or the old system of “certain” rules - which weren’t actually certain at all – recurs on the basis of the one-fits-all model. The cold fusion of these two approaches has produced only a regulatory paradox that will most likely live on in the legal system and have application in the knowledge that these two antithetical souls should not collide.

On the external side, however, the scenario can only be even more discouraging. This is because the reform of the new Stability Pact decided not to involve the treaty level. That is to say, it was assumed that there was no need to revise the two cornerstones of fiscal governance (the 60 percent of debt and the 3 percent of deficit), and not to structurally open up to the separation from the debt calculation of those investments that guarantee economic multiplier and those finances earmarked for essential public services (the famous golden rule).

The constitutional significance of this policy choice is clear: fiscal discipline and austerity remain the hegemonic paradigms around which building the new European economic order, even after the pandemic experience. As well as it seems clear that, if spaces for public intervention in the economy had opened up in the health emergency, this new governance arrangement definitely closes them. Put another way, for the vast majority of European states (including Italy), with even the additional indebtedness caused by the pandemic and wars, the possibility of having budgetary and spending leverage to pursue the goals of the welfare and constitutional state is precluded.

Closing with a reflection on the topic of governing by numbers, one could say that, paraphrasing an essay from a few years ago, “Numerical rules or political government, that is the (European) question,” the reform of European economic governance seems to have already answered this question. We are facing, in short, a substantial missed opportunity to recast those European economic fundamentals that now define the constitutional structures of our societies.