Cyprus Mail
CM Regular ColumnistOpinion

Reform of the fiscal framework in the EU

file photo: european union flags flutter outside the eu commission headquarters in brussels

By Andreas Charalambous and Omiros Pissarides

The economy in the EU is gradually improving, despite the continuing pandemic. The historically unprecedented monetary and fiscal support was a decisive factor, which was, however, accompanied by the seemingly unavoidable impact of higher inflation and public debt. Taking this mixed picture into account, in conjunction with the continuing uncertainty, the question arises as to whether an adjustment of the overall EU fiscal framework is required, to what extent and over which timeframe.

Fiscal policy in the EU is based on the Stability and Growth Pact. It is generally acknowledged that this pact, despite its shortcomings, has contributed towards embedding macroeconomic stability and confidence in the EU.

Nonetheless, the current situation requires further and far-reaching changes. Most reform suggestions refer to: (a) enhancing flexibility, in particular during periods of economic downturns, (b) simplifying the requirements for member states and (c) transferring some of the tasks and responsibilities from the EU to the national level.

It is widely recognised that the existing framework does not encourage, to the required extent, forward looking public investments related to social cohesion, combating climate change and promoting digitalisation, an area where the EU is considerably lagging behind. Moreover, the excessive public debt in southern EU member states would lead to unsurmountable problems, should these countries be forced to an abrupt adaptation, in line with the spirit of the current framework.

This topic was at the centre of debates during the recent electoral campaign for a new parliament, as well as the negotiations leading to the adoption of the programme of the new coalition government in Germany. The outcome of these debates is crucial for the future of the EU and can be summarised as follows.

Firstly, there will be no attempt for changes, either in the EU treaty or the German constitution. Secondly, the capital of those public entities which do not belong to the government in a narrow sense, will be strengthened, with a view to enhancing their ability to invest in priority sectors, without this counting towards the public deficit. Thirdly, there are reflections on methodological changes regarding the measurement of fiscal deficit, which would allow a smoother fiscal adjustment during the post pandemic period.

Furthermore, there are thoughts of fully exploiting the borrowing margins permitted for the year of 2022, during which the application of the provisions of the Stability and Growth Pact have been suspended, and/or to extend the period of suspension into 2023.

All these options would facilitate the necessary fiscal adjustment, in a way that would not jeopardise the weak recovery and would not affect the implementation of necessary programmes and projects in the social sector, the environment and technology.

Most analysts consider that the above-mentioned policy changes do not go far enough.

Cyprus belongs to the countries with a high public debt and, at the same time, high investment requirements for adapting to the future challenges. Hence, it is recommended that Cyprus fully exploits the EU Next Generation fund, including the amounts that could be borrowed, with a view to enhancing its ability to undertake future investments, reform the taxation system to yield additional resources and contain non-essential public spending.


Andreas Charalambous is an economist and a former director of the Ministry of Finance. Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment




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