Europe’s New Fiscal Rules Harm Working People and Women, Boost Right-Wing Radicals

Yves here. Due to the geopolitical situation being particularly fraught right now, important developments on the political economy are not getting as much attention as they warrant. One is expected-to-be-implemented new EU fiscal rules, which are expected to hit some of the biggest economies like France and Italy particularly hard. The result, among other things, will be further cuts to social programs. And despite the efforts among the EU elites to reverse the rise of the so-called populist or radical right, depending on your druthers, they have become seemingly the only advocates of working people by focusing on their deteriorating living standards. Yes, their policy proposals include things like limiting or barring immigration and abandoning climate change initiatives. But when the nominal leaders offer only hair-shirtery as an alternative, you can see why the right is getting more traction.

By Lynn Parramore, Senior Research Analyst, Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

ecently, the European Union (EU) finance ministers agreed to reform the bloc’s fiscal rules. The legislative package still has to be approved by both the European Council and the European Parliament by the end of April 2024. Amidst promises to stimulate public investment, foster growth, and create jobs, the new rules set minimum amounts of average deficit and debt reduction that EU countries will have to respect; otherwise, they may be sanctioned.

Misinformation proliferates around few topics as readily as national debts and deficits, often amplified by influential and respected media outlets. To sort out fact from fiction, INET is joined by Helene Schuberth, chief economist and head of the Economics Department of the Austrian Trade Unions Confederation (ÖGB) since May 2022. She previously headed the Foreign Research Division of the Central Bank of Austria and served as an economic adviser to the chancellor and the president of Austria.

Lynn Parramore: Why do we have fiscal rules in the first place?

Helene Schuberth: Why do we have them? Well, I think fiscal rules in general are very reasonable. In a monetary union, you always want to avoid a situation where countries are pursuing fiscal policies in which debt ratios become unsustainable. This incurs risks to price stability.

Fiscal rules were implemented in the Maastricht Treaty in 1991 (signed 1992), with an arbitrary 60% debt ratio and a 3% deficit ratio, as a precondition for entry into the European Monetary Union. They were successively tightened, first with the Stability and Growth Pact in 1997 and later, in 2012 with the fiscal compact. Following the austerity crisis in the eurozone, the rules were somehow relaxed, and during the pandemic and the energy crisis an escape clause allowed the member states to deal with the multiple crises. Now, for the first time since a decade ago, the rules will become restrictive again. From the beginning, they were subject to much criticism. Fiscal rules should be designed in an economically reasonable way and they should be simple. Otherwise, democratic accountability is impaired. Both principles are far from being fulfilled with the new fiscal rules.

Compared to the U.S. economy, the EU economy has emerged from the past crises severely weakened. In this situation, the EU risks another round of austerity, which is very problematic. The United States has made major public investments with initiatives like the Inflation Reduction Act. There has been a massive industrial impetus to the economy. We desperately need public investment in the EU, but austerity measures put this at risk.

LP: Could you discuss how the restrictiveness of the new rules would be harmful in terms of the austerity risk?

HS: Strikingly, the large EU countries are the countries with the highest public debt ratios. Excluding Germany, which has its own fiscal straitjacket, high-debt countries like Italy, France, Spain, Netherlands, Poland, and Belgium face the biggest consolidation demands. For instance, Italy has to reduce its fiscal deficit by 1% of GDP per year. France has to consolidate nearly as much.

These large countries make up half of the EU’s GDP. This is important because if they all have to consolidate simultaneously, this will have a huge impact on economic growth. This risks another wave of austerity, a situation in which growth is declining, which in turn makes it even more difficult to achieve the debt ratio targets because the target is defined as public debt divided by GDP.

LP: Reuters published a summary of the new fiscal rules that included this statement: “The reform was necessary because the COVID-19 pandemic and the energy price crisis caused by the Russian invasion of Ukraine caused a surge in public debt that made the previous rules unrealistically tough.” What’s your take? Is this statement factual?

HS: I disagree on two grounds. The first issue is the narrative that the debt ratios increased after the pandemic and the energy crisis. It’s correct for the pandemic, but during the inflation crisis, the debt ratios have come down again. Between 2020 and 2023, the debt ratio declined by about 10 percentage points in the eurozone, and it has declined by more than 8 percentage points in the EU. Inflation has increased a lot and this has brought the debt ratio down. It’s a numerical issue.

My second point is with the statement about the restrictiveness of the previous rules. There is some truth to it, but whenever you criticize the new rules, the natural response is, well, they are softer. In reality, though, they are still too restrictive. My guess is that the new rules cannot be implemented easily and they will mean huge costs in terms of economic growth and in terms of the risk of dismantling the social protection system, the welfare state.

LP: Yet advocates insist that the reforms are all about promoting economic growth and jobs. Is there any truth at all to these claims?

HS: They are not correct. This is part of the technocratic narrative. We’re told that the new rules incentivize investments, which will mean jobs and growth – some of them are investments in the ecological transformation There are some incentives for public investment, but according to the rules, if you do public investment, like an increase in infrastructure or defense expenditures which are supposed to go up in the coming years, then you are obliged to strongly reduce public expenditures somewhere else. Alternatively, wealth tax revenues or windfall profit tax revenues could be increased, but this is politically not realistic.

The major fear of progressive economists and others concerned with civil society is that the new fiscal rules are really associated with a huge effort to dismantle the welfare system.

LP: Who gets hurt most by the new rules? Who stands to benefit?

HS: The working class will be hurt most, women in particular. They were bearing the brunt of the past austerity in the EU. This is well documented in several studies. Women are often the primary beneficiaries of many social expenditures.

As to who will gain, that’s very difficult to tell. The parts of the ruling political elite who advocate the strict rules aim precisely to dismantle the welfare state. There have been so many efforts in past decades to do that, with limited success. But right now we may be at a turning point. I always wonder why this topic hasn’t attracted more attention, because we’re already hearing messages to this effect. For instance, the finance minister of Germany said that because we have to increase military expenditures, a moratorium on social expenditures is warranted.

LP: In the big picture, what kind of political developments might we expect from the new fiscal rules? Which parties gain power?

HS: This is an important issue. Following the rise in inflation, Europe has grappled with a cost of living crisis, marked by soaring expenses in housing, energy, and food. This surge in living costs contributed significantly to the growing traction of radical right-wing parties. It’s a very, very tense situation right now in Europe. If you add the new rules, you limit the ability of countries to guarantee what people long for most: economic security. It’s like a straitjacket. This will be a boost for the extreme right-wing parties, as it has already been.

If I may add, the investment demands are staggering. It’s intriguing that while the European Commission outlines ambitious goals for socio-ecological and digital transformations, along with public investment needs, there’s a stark contrast in the significant constraints most countries face. Public investment needs alone, at the minimum around an estimated 1.6% annually, are crucial for ecological transformation, excluding other vital areas such as social needs like challenges from aging and care. The needs are great, but most of the countries will be severely restrained. This doesn’t make sense. You cannot achieve ambitious goals while restricting the countries from accomplishing them. You can’t increase the necessary public investments for the socio-ecological and digital transformations and simultaneously reduce debt, especially if you’re unwilling to increase wealth taxes.

LP: Why is taxing the wealthy off the table when discussing these issues? It’s curious that those who express concern about national debt and deficits are often the same individuals reluctant to entertain the idea. Often they want to cut taxes for the rich.

HS: I have a crystal clear view of this. The power of the media is very important, and the media are, to a large part, owned by the very wealthy. The social media are also playing a huge role. It’s very, very difficult.

20 years ago, I was fascinated by the concept of deliberative democracy, meaning that by finding the best arguments, you can achieve something in the political debate. But now I think the elite political class is completely decoupled from deliberative issues like arguments or economic research. I have colleagues in my country who are doing great work on wealth inequality, showing how easy it would be to introduce financial transaction taxes, wealth taxes, capital gains taxes, and inheritance taxes, but the elite class ignores their work.

Receiving a tax-free, non-performance-related income has already alarmed the historical advocates of economic liberalism. In a market-orientated open society, so the credo goes, privileges should only be claimed as a reward for personal contribution to this society – in contrast to aristocracy and feudalism, where privileges, status, and wealth are inherited. In this respect, the socio-political systems of many countries resemble a feudal social order in which one’s fate depends on the status of one’s parents. The very rich, the billionaires, are extremely influential because wealth goes along with increased political power and their power with regard to the media. That’s a major issue. I’ve experienced many devastating things, but one of the most shattering issues was the fact that the EU was not capable of introducing a financial transaction tax despite the fact that the financial sector has caused so much damage to our society. Even the International Monetary Fund, the OECD, and the European Commission were in favor of implementing this kind of tax. Yet it never happened.

Today, look at the windfall profits from the energy sector, from the banking sector, or from the food industry. We have an existential threat with regard to climate change, with regard to geopolitical issues. Even in the face of these enormous challenges, the super-rich are unwilling to contribute.

One argument as to why there is so much silence on these new fiscal rules is that the old ones were more restrictive than these. Okay, that’s partly true, but as I’ve said, they’re still overly restrictive. The second argument as to why there is silence is that some argue that the rules open the door for increasing wealth taxes: Given the enormous financing needs, without taxing the super-rich, it becomes impossible to implement fiscal rules effectively. If there are stringent fiscal rules in place, it’s necessary to ensure taxation from the affluent to uphold those rules – so it is said. But this is overly naïve. First comes the dismantling of the welfare state. The poorer households, the workers, and the women are affected most – these are the parts of society where the share of voting participation is lowest. The rich, they vote. The poorer individuals vote less.

LP: In a recent piece for INET, you outlined your concern that the new rules neglect democratic accountability.” Can you elaborate?

HS: I’m happy that you brought this question up because that’s one of the most critical aspects of the new fiscal rules. They obstruct democratic legitimacy for two reasons. First, they rely on a methodology by experts from the European Commission which is so opaque that it’s not even fully comprehensible for experts, let alone for policymakers. I mean, any rule should be transparent, right? But these rules are just overly complex and opaque.

Regarding the methodology, it’s important to note that the Economic Committee of the European Parliament in early March was deliberating on a framework without access to all aspects of the methodology, as it had not yet been published. Yet they voted on a framework anyway. Wow. I mean, that’s bizarre. Why didn’t any member of the European Parliament ask for the precise methodology before they made a decision? Now the methodology has been published and one absurdity catches the eye immediately: The new rules implicitly assume that they will be breached later and, in anticipating this, the consolidation path is tightened.

The second point is that the EU usually makes non-binding recommendations for the countries with regard to economic policy reforms, such as pension reforms. As I mentioned, with the new rules there are incentives to do public investment: if a country credibly assures that it invests, for example, in the transformation, it has to consolidate less, but a less stringent consolidation path has to be approved. The Commission may then press the countries to do structural reforms, such as deregulating the economy or dismantling the welfare state. This would be a dramatic shift from the usual practice where the Commission can only issue recommendations that are non-binding.

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  1. DJG, Reality Czar

    Thanks for this. The potential disaster for Italy has already been reported in some newspapers. Giuseppe Conte, and the Five Stars Movement, have been leading critics, along with Sinistra Italiana, which these days spends most of its effort opposing just about everything coming from the EU and the current Italian government. I am glad to find out that there are people in Germany aware of the peril, what with Germany coming off so quiescent these days.

    I note that Roberta Metsola, Giorgia Meloni, and Ursula van der Leyen all support these rules, so a class analysis is called for here: The reason that the women of the 90 percent will be disadvantaged has to do with class warfare. It is increasingly evident that the EU is just one more parasitic neoliberal vacuum cleaner for money.

    And note this from the end of Helene Schuberth’s excellent analysis: “First, they rely on a methodology by experts from the European Commission which is so opaque that it’s not even fully comprehensible for experts, let alone for policymakers. I mean, any rule should be transparent, right? But these rules are just overly complex and opaque. Regarding the methodology, it’s important to note that the Economic Committee of the European Parliament in early March was deliberating on a framework without access to all aspects of the methodology, as it had not yet been published. Yet they voted on a framework anyway.”

    We are discussing a thoroughly corrupt institution, which also is throwing money into the slaughter in Ukraine.

    Yet there is so much money floating about that this situation can go on indefinitely. One can always call out the mounted police to trample citizens at demonstrations and at factory takeovers (at whatever factories still remain).

    1. DJG, Reality Czar

      I just read The Duran piece on economic decline with Hudson, Diesen, and Mercouris, also posted this morning here at Naked Capitalism. Worth your while.

      Note this analysis by Hudson:
      “America, and also, I think, Western Europe, has painted itself into a corner that is now systemic. The whole trend from 1945 to today, all of these 70 years have built up such rigidities that there’s no way that you can break them down. And the idea that somehow there’s a government policy that can fix things won’t work either, unless it’s so radical a policy that it won’t be the current economy anymore.”

      Helen Schuberth is describing the same rigidities. We are in a time of outmoded thinking. Mainstream liberals and mainstream conservative and even reactionaries are all living in some mythical glorious free market and ignoring the consequences of their own antiquated views.

      1. Ignacio

        But, but the garden, we are the garden, so I’ve been told. Something must be wrong on this analysis, something has to give. ;(

        1. DJG, Reality Czar

          Sì, sì, Ignacio, but you and I are in the garden with the PIIGS. And we are in a pickle, to mix metaphors.

          Something has to give, as you say.

    2. Kouros

      Europe is just reverting to its glorious past of a parasitic upper crust feeding of the trodden masses…

  2. NN Cassansra

    I don’t think there is supposed to be any rational deliberation about this. All these fiscal rules look a lot like the talk about Russia, which is two days from total defeat and simultaneously on the verge of taking over Europe.

    So EU states are in crisis and close to bankruptcy, thus the need for tightening, then COVID & Ukraine happens and suddenly these rules can be temporarily shelved, because apparently disease and war make you able to comfortably take on more debt. Then there is tightening since bankruptcy is night again, but also there are millions of exceptions (like money for war, obviously) so the deficits keep accumulating anyway.

    And to top it all off, even if the rules were implemented as presented, it would still mean the “debt” will never be paid off, in fact it will rise exponentially forever, because these “breaks” are taken relative to exponentially rising number (i.e. GDP).

  3. Piotr Berman

    To summarise, the Lords of EU want to increase military spending and not-necessarily-productive investments, stick to fiscal responsibility and treat the wealthy as sacred cows. OK, perhaps some period of declined welfare, declined demand, declined economic activity etc. is in order to restore some desirable balance, while the wealthy are indispensable as patrons of culture (like architecture of their homes), innovation (how to avoid taxes) etc., and avoiding increase in military spending may lead to a less manly foreign policy — avoiding conflicts is for sissies! But somehow it does not add up.

  4. Belle

    Looks like Mundell’s plan is coming to fruition. At this rate, the only non-neoliberal country in Europe may be Norway. (And Russia in some ways.)

  5. jobs

    Quoted from the new fiscal rules:
    “The reform was necessary because the COVID-19 pandemic and the energy price crisis caused by the Russian invasion of Ukraine caused a surge in public debt that made the previous rules unrealistically tough.”

    Wrong. The energy price crisis was caused by the EU being a US vassal.

  6. Synoia

    Well, instead of coming clean and admitting to a serious error (Ukraine) the whipping will be intensified too keep, your beloved leaders wealthy.

    Fundamentally we will impose the very effective feudal system beloved by us betters as used in the past.

    Remember that the whipping will continue until morale and our fortunes improve.

  7. eg

    The Euro area is a neoliberal fantasy land where the impoverished citizenry is expected to reproduce itself without the basic necessities of life, and armed forces are to be conjured from the nonexistent offspring of a continent that is in demographic decline because the neoliberal masters impoverish the citizenry — it is an insane asylum as ouroboros.

    It is doomed.

  8. MFB

    Well, if the European elites want to load a shotgun, point it at their countries’ feet and press both triggers, that isn’t a problem for those of us who don’t live in Europe.

    But what will this do to the countries which are trying to export goods to Europe? It looks as if we might be in for some thin times, and it’s not as if the global economy was exactly powering along — except for the financial sector, of course.

  9. James E Keenan

    The interviewee wrote:

    Fiscal rules were implemented in the Maastricht Treaty in 1991 (signed 1992), with an arbitrary 60% debt ratio and a 3% deficit ratio, as a precondition for entry into the European Monetary Union.

    Prior to Maastricht, did any EU countries tie themselves up with fiscal rules? Were they obsessed with debt-to-GDP ratios?

Comments are closed.