EU's Revised Fiscal Policies: Harmonizing Budgetary Management with Environmental and Technological Objectives
EU Fiscal Framework: Bridging the Gap for Green and Digital Transition
The European Union's revamped fiscal rules, effective from 30 April 2024, aim to maintain fiscal prudence while providing a foundation for financing the green and digital transition. However, the current rules constrain member states' ability to increase spending, creating a significant funding gap.
Under the new EU fiscal framework, options to expand the fiscal space for additional public expenditure include modifications to key technical assumptions underpinning the new rules, the establishment of a permanent EU investment fund for climate and digitalisation, and optimizing national fiscal governance.
The framework does not include broad exemptions for public investment at the national level. Instead, temporary exemptions granted for additional defence spending result in a more expansionary overall fiscal stance across the EU. However, the initial round of multi-year budget plans submitted to the European Commission indicates that the nationally financed public investment rate is projected to decline in more than a third of countries.
To meet the ambitious policy goals of the green transition, significant investment in replacing and expanding the capital stock over the coming decades will be necessary. Three potential strategies to expand the fiscal space available for public spending on the twin transition within the constraints of the new EU fiscal rules include modifying technical assumptions in the Debt Sustainability Analysis (DSA), reallocating resources from less productive areas to the twin transition, and exploring innovative financing mechanisms.
Investments financed by a potential EU investment fund could prioritize genuinely European public goods projects, such as a European high-speed train network, an integrated electricity grid for renewable energy transmission, digital infrastructure, or cross-border digital identification systems. The European Commission has proposed making the next Multiannual Financial Framework (MFF, 2028-2034) more flexible, moving away from fixed programmes towards a general budget pool designed to address broadly defined EU objectives.
Member states can commit to a package of investment and reform measures, potentially extending the fiscal adjustment period from 4 to a maximum of 7 years. To qualify for this extension, the package must be growth-enhancing, consistent with debt sustainability, address shared EU priorities, align with country-specific recommendations within the European Semester, and maintain at least the existing national investment level.
The new EU fiscal rules prioritize a medium-term perspective on public finances, focusing on limiting the growth of government expenditures. The framework does not explicitly consider government net worth, focusing instead on public liabilities. Policymakers must identify new long-term financing solutions for the green and digital transition. An increase in the fiscal deficit resulting from higher-than-planned co-financing of EU programmes will not be considered a breach of the rules' expenditure ceilings. The European Commission will exclude national spending on co-financing of EU-funded programmes from government expenditure calculations under the new fiscal rules.
The European Commission could establish a dedicated investment fund for climate and digitalisation at the EU level, similar to the Recovery and Resilience Facility. This fund, along with strategic use of available fiscal space, budgetary reforms, and enhancements to EU-level financial instruments, could help bridge the gap for green and digital transitions, ensuring the EU remains competitive in the global market.
- The new EU fiscal framework acknowledges the need for financing the digital transition, which could be achieved through modifications to technical assumptions, the creation of a permanent EU investment fund, and improvements in national fiscal governance.
- In light of the constraints posed by the current fiscal rules, meeting the ambitious policy goals of the green transition necessitates exploring strategies such as modifying technical assumptions, reallocating resources, and investigating innovative financing mechanisms.
- To ensure the EU's competitiveness and close the funding gap for both green and digital transitions, policymakers might consider establishing a dedicated EU-level investment fund, optimizing national fiscal governance, and enhancing EU-level financial instruments.
