Home » Departments and Centres » Robert Schuman Centre for Advanced Studies » Opinions » When flexibility can make a difference

When flexibility can make a difference

By Antonia Carparelli, 
Economic Advisor, European Commission Representation in Italy
EU Fellow 2013-2014

 

11 February 2015

 

The European Commission has started the New Year with two important initiatives to stimulate growth and employment in Europe: the draft bill establishing the European Fund for Strategic Investments and the Communication on flexibility in the application of the Stability Pact, both adopted on January 13th.

The bill for the new European Fund is an essential step to make operational the Juncker Plan for Investment, which, however, will have to be discussed and approved by the Council and Parliament. The Communication on flexibility instead has immediate impact, because it is not a legislative proposal but rather a clarification of how the new Commission intends to apply the rules of the Stability Pact.

Since its origins, the Stability Pact contained clauses that allowed some relaxation of budgetary rules in exceptional circumstances. These clauses were confirmed and partially reinforced in subsequent reforms of 2005 and 2011. However, their potential had remained largely unexplored so far. Persistent economic weakness and output contraction in some countries have advised to clarify the scope and limits of these clauses, while preserving the existing legislative framework.

The Commission communication refers to three flexibility clauses:  the investment clause, the structural reforms clause and the cyclical conditions clause.

Let us start from the latter, which is also the most immediately applicable.  Here the Commission introduces the concept of "modulation" of the fiscal adjustment effort.  In particular, the fiscal adjustments that will be required to each country will be modulated according to the cyclical conditions of its economy.  The better the macro-economic situation and the greater the effort required and vice versa. The parameters of the modulation are published in a matrix annexed to the Communication.

The investment clause is closely linked to the Juncker Plan for Investment and is limited to investments of European relevance.  First, the Commission clarifies that the direct contributions of countries to the European Fund for Strategic Investments will not be "counted" for the purposes of the excessive deficit procedure.  In addition, the Commission will take account of the national co-financing of European programs in assessing progress towards a balanced structural budget and will permit "temporary deviations" from the route, but only if the economy is in recession and provided that the 3% (nominal) threshold in the deficit/GDP ratio is respected.

The third clause of flexibility regards structural reforms, in particular those aiming at increasing competitiveness and growth potential. Again, the Commission will admit "temporary deviations" from the adjustment path, if important reforms are undertaken, but such deviations shall not exceed 0.5% of GDP and the deficit/GDP ratio must remain below 3%.

In summary, the Commission seems determined to make "the best use" of the flexibility provided by the Stability Pact, but it has also made clear that this flexibility will have to be applied within certain limits and with great credibility, so to ensure market confidence and mutual trust between countries.

It is now up to national governments to make good use of flexibility:  by redirecting public expenditure from current spending to productive investment; through courageous and growth enhancing structural reforms; with continued efforts for fiscal consolidation.

A final remark. A credible and effective application of the new flexibility will require a thorough assessment of the impact of investment and structural reforms on competitiveness and on potential growth, as well as on financial sustainability. This opens an important space for methodological analysis and applied research, which hopefully the scientific community will be eager to explore.

Page last updated on 18 August 2017