Europe’s policymakers risk crashing its recovery

A fight over deficit and debt rules could undo hard-won progress.

Europe’s policymakers risk crashing its recovery

Mujtaba Rahman is the head of Eurasia Group’s Europe practice and the author of POLITICO’s Beyond the Bubble column. He tweets at @Mij_Europe.

COVID-19 has been good for the EU.

Unlike any other region in the world, Europe is now both more cohesive and resilient as a result of the crisis. But these precious gains risk being lost if the economic recovery isn’t sensibly managed. As policymakers begin to negotiate the bloc’s fiscal rules, there are worrying signs ahead.

Two reasons explain the EU’s greater resilience after COVID. The most important is the creation of the recovery fund — a vehicle set up at the height of the crisis to enable large-scale Europe-wide borrowing on capital markets, which is then transferred to member countries hit worst by the pandemic. By facilitating their economic recovery, without increasing their debts, the fund has made the eurozone more robust and will set a precedent for how the EU manages external shocks in the future.

The recovery fund has also made it harder for populism to prosper. It’s hard to rail against €180 billion — close to 10.5 percent of gross domestic product (GDP), in Italy’s case — explaining why Matteo Salvini’s nationalistic far-right League party duly entered into a reform-oriented coalition led by Prime Minister Mario Draghi.

There are other reasons why populists had a bad crisis. The simplistic country-first solutions peddled by the likes of Salvini and France’s Marine Le Pen in recent years became much more implausible in a pandemic, which is global by nature. Countries where populists managed to turn voters against immigration also found that immigrants tend to work in essential frontline roles. With growing deference to scientists, anti-expert sentiment across the Continent also receded, and the EU’s vaccination effort is now a resounding success — with 70 percent of adults fully vaccinated. 

However, these achievements risk coming apart if EU countries mismanage the recovery. Key to that will be whether — and how — the EU’s fiscal rulebook, known as the Stability and Growth Pact, is reformed. 

The pact dictates that the deficits and debt levels of EU countries should not exceed 3 percent and 60 percent of GDP, respectively, and must fall quickly if they do. But during the pandemic it was suspended under a provision known as “the general escape clause.” The pact is due to come back into force in 2023, and if the rules don’t change, the EU’s national governments will be forced into unprecedented tightening, having implemented unprecedented fiscal support throughout their lockdowns.  

A public “reflection” of the rules, involving expert stakeholders, academics and think tanks, will be kicked off by the Commission later this month. There’s little doubt as to the conclusions that will emerge: They will suggest that the emphasis of fiscal policy should shift away from austerity toward growth and that more attention should be paid to incentivizing public investment in Europe’s green and digital transitions. 

Sensible as these suggestions may be, substantive negotiations between member countries and EU institutions will only begin once a new German government is in place. Based on events in Berlin, this could be early next year. 

However, the Commission needs to provide a clear direction for national governments on what the EU’s fiscal objectives for 2023 will be. The deadline for that is next April, when EU countries submit their so-called Stability and Convergence Programs, previewing their budgets for the fall. 

Assuming a coalition is in place in Germany by the end of the year, that leaves roughly four months to build consensus on what the EU’s forward-looking fiscal rules should be. It is this truncated time frame that fiscal hawks are opportunistically trying to exploit. 

Opposing substantial change will be Valdis Dombrovskis, executive vice president of all things economy. Dombrovskis remains keen to put countries with unrelenting hight deficits and high debts — including France, Italy, Spain, Greece and Belgium — into an “excessive deficit procedure.”   

Other senior voices in the Commission are also looking for a more orthodox implementation of the Stability and Growth Pact and worry the Commission is seen to always err on the side of leniency. Indeed, even those who favor reform are not pushing for a further suspension of the rules in 2023.  

Facing Dombrovskis are the European Central Bank, the European Fiscal Board, a majority of the College of European Commissioners and, importantly, Commission President Ursula von der Leyen. She wants a “new set of rules for the medium term,” says one senior EU official with knowledge of her thinking, “especially to facilitate the green transition.” 

While Northern Europe will likely oppose big reforms, Berlin’s position is less clear and will ultimately depend on the nature of the new government. The risk is that an inexperienced chancellor who is consumed by coalition management will be more cautious and less ambitious in Europe.  

In light of these signals, French Finance Minister Bruno le Maire has been downplaying expectations of a deal under France’s presidency in the first six months of next year. Still, the best-case scenario for reformers would be for the French presidency to take up concrete legislative proposals on Europe’s new fiscal rules early next year. The Stability and Growth Pact’s deficit and debt levels are defined in the Maastricht Treaty, but the pace at which debt levels must be reduced each year is not.  

That gives space for a new, simpler framework that would also exclude investments in high-quality public goods from EU deficit calculations and amend the debt rule that stipulates member countries with debt ratios above 60 percent reduce their excess debt-to-GDP levels by 1/20th every year. 

Some in Brussels and Paris would also like more decentralized fiscal governance, allowing EU capitals to design their own adjustment path, with the Commission playing referee and drawing up the consequences if national efforts should fail. 

If there is no consensus over these issues by March, the Commission would instead be forced to issue a communiqué — interpretive guidance for member countries pointing to where Brussels believes the fiscal framework will end up. The purpose would be to give governments enough latitude to interpret the rules more flexibly — on the basis of where they are heading, as opposed to what they say today. 

It is in this scenario that Northern European fiscal hawks will pounce — pushing for member countries to default to the old rules while the new ones are renegotiated. This could result in a large number of excessive deficit procedures. As another senior Commission official says, “Some people argue you can decouple the reflection and our annual fiscal cycle. So you could open EDP’s and then see how the review plays out.” The official continues, “Momentum might vanish if we discuss for too long without tabling legislation.”

Most officials in Brussels believe the Stability and Growth Pact won’t be fully reapplied in a mechanical fashion in 2023 and that the “brakes won’t be whacked on full throttle.” The idea of putting France into an excessive deficit procedure on the heels of Emmanuel Macron’s presidential election, for one thing, is extremely unlikely.  

But that outcome remains far from clear. Hanging in the balance is the EU’s recovery — and the credibility of its net-zero transition. 

Source : Politico EU More   

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When Boris Johnson turned green

The PM claims his time as London's mayor changed his mind about the need to act on climate change.

When Boris Johnson turned green

NEW YORK — Boris Johnson said he came of age on climate change when he was in charge of London — and now he wants the rest of the world to do the same. 

The U.K. prime minister told reporters he “really dug deeper into the science of it” when he was mayor of the U.K. capital between 2008 and 2016 and concluded there was “no question that we have to deal with it.”

In his speech to the U.N. General Assembly in New York on Wednesday, Johnson said it was time for humanity to “grow up and halt the slide towards dangerous rising temperatures and protect the planet.” The irony is that while many grown ups around the world were trying to fix the problem, Johnson spent much of the past couple of decades casting doubt about the need to do anything at all.

On his way to New York, Johnson admitted he had not always seen the climate crisis as pressing. “If you were to excavate some of my articles from 20 years ago, you might find comments I made obiter dicta about climate change that weren’t entirely supportive of the current struggle,” he confessed. He added that “the facts change, and people change their minds and change their views and that’s very important too.” 

Others who were right all along wish the facts were indeed fungible. In an interview with NBC Nightly News, former U.S. vice president and long-time climate campaigner Al Gore said: “I wish the scientists whose work I was simply conveying had been wrong. But they weren’t wrong and they’re not wrong now.”

Since the facts have not changed, POLITICO asked Johnson on a train journey between Washington and New York what prompted him to rethink his stance. Some say his environmentalist wife, Carrie Symonds, has been a powerful influence on his thinking. But Johnson insisted there wasn’t one single moment, statistic or person that had affected his view. “I wouldn’t say there was one specific epiphany,” he said.

Whether Johnson did wake up about the threat of global warming during his tenure as London’s mayor is far from clear. “I am all for theories about climate change, and would not for a moment dispute the wisdom or good intentions of the vast majority of scientists,” he wrote in a column for the Daily Telegraph in 2013. “But I am also an empiricist; and I observe that something appears to be up with our winter weather, and to call it ‘warming’ is obviously to strain the language.”

The Johnson skeptics remain skeptical, and mull whether his new climate zeal is motivated more by electoral politics than science. “I think the Conservatives got a sharp shock at the 2017 election [when they lost their majority] — and in their soul searching, realized climate change is important to voters, particularly younger ones,” said Richard Black, senior associate at the Energy and Climate Intelligence Unit. “Hence the net-zero target, hence hosting COP26,” the United Nations Climate Change Conference that’s due to be held in Glasgow in November.

Black added: “There’s no doubt he has been on a journey on the issue but he’s not the only Conservative MP who’s expressed doubts in the past but now espouses the myriad benefits of a net-zero transition.”

Others are just happy Johnson is now picking up the stick at the right end. “I think it’s good that he is saying these things and I think a good strategy would be to keep encouraging him,” said Mohamed Nasheed, former president of the Maldives and the current speaker of its parliament.

Whatever his motivation, Johnson is making the climate argument in true Johnsonian language. “We have come to that fateful age when we know roughly how to drive and we know how to unlock the drinks cabinet and to engage in all sorts of activity that is not only potentially embarrassing but also terminal,” he declared at the summit. 

“My friends, the adolescence of humanity is coming to an end,” he added. “We are approaching that critical turning point — in less than two months — when we must show that we are capable of learning, and maturing, and finally taking responsibility for the destruction we are inflicting, not just upon our planet but ourselves.”

The “critical turning point,” he argued, should be the COP26 summit. Johnson wants other nations to phase out coal by 2030 for the developed world and 2040 for developing countries; abandon polluting vehicles by 2035 at the latest; deliver $100 billion in climate finance per year for developing countries; and to stop deforestation by 2030.

His hope is to stop global temperatures rising by more than 1.5 degrees Celsius — the U.N. says the world is currently on track for 2.7 degrees Celsius. A pledge from the U.S. to double its funding to the development pot and a promise from China to stop investing in overseas coal plants have been a big puff into the sails ahead of the climate summit.

“Moving swiftly to net-zero emissions is the perfect Boris Johnson policy in that you can really can have your cake and eat it — reducing emissions to tackle climate change while also reaping the economic benefits of increasingly cheap clean energy,” said Black. But he warned that the government is “behind on its own agenda, with policies on decarbonizing, heating and the overall net-zero strategy seriously and somewhat embarrassingly, given COP26, overdue — and stale cake is to no one’s liking.”

Source : Politico EU More   

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