“Austerity is dead; long live austerity!?”

Five reasons why the EU Stability and Growth Pact needs a reset, not a make-over.

The EU’s Stability and Growth Pact (SGP) came into being in the 90s due to pressure mainly from Germany, and it had significant flaws from the start. The Pact was based on neoliberal ideology, which applied criteria that led to dismantling of social welfare systems and the deregulation of labor standards, financial markets, and investments.

In technical terms: The Stability and Growth Pact stipulates that states must limit their annual budget deficit to 3% of their gross domestic product (GDP) and the level of their public debt to 60% of their GDP. These – largely arbitrary – digits constitute the so-called “Maastricht criteria”.

Depending on an EU country’s perspective, the SGP quickly became a lame duck or a deadly beast. Hardly any EU member ever cared about respecting the fiscal surveillance procedures, but some paid a high price. The so-called European debt crisis served as a blueprint for the adherents of neoliberal ideology to whip Europe further down the path of budget-cutting, deregulation, privatisation and social dismantling. It imposed years of prolonged economic hardship, stagnation and cuts to the public sector across Europe, as it hampered the capacity of individual member states to take best care of those most in need.

At the start of the COVID-19 pandemic the EU Commission, realising that by limiting governments’ abilities to spend during the health crisis it would make the recession worse, temporarily lifted the fiscal surveillance procedures in 2020. Bravo! This was a long-standing Left demand, but the abolition of Eurocaustic SGP rules should have been permanent, not temporary.

Public investment is crucial in the context of the technological and economic demands of the “green” and digital transition . With significant public pressure on EU leaders to indefinitely walk back the obtuse constraints of the SGP, the Commission proposed a reform of EU Economic Governance rules on 26 April 2023, intending to simplify the rulebook, facilitate reforms and investments for EU priorities and strengthen enforcement.

The adoption of the proposal requires unanimity among the member states.

Fun fact: 27 years after German politicians imposed the SGP on its European neighbours, the German government is blocking any attempt to replace the Pact with a progressive and sustainable Economic Governance rulebook.

Here are five reasons why the EU Commission’s proposal to reform the Stability and Growth Pact is a missed opportunity to end austerity in the EU. While it introduces some flexibility to the existing criteria, it still enforces strict public spending and debt rules, preventing member states from investing in public services and social protection systems.

1. The proposal does not question the objectives of the SGP, nor does it question the foundational pillars (60%- and 3%-rule or the Excessive Deficit Procedure). Rather, it proposes to change the way in which fiscal surveillance operates to, eventually, strengthen enforcement.

2. The proposal does not introduce any new measures to promote social justice or reduce inequality in the EU. This means that member states will still be under pressure to implement austerity measures that disproportionately impact the working class.

3. It does nothing to democratize economic governance, as it does not substantially strengthen the role of the European or national parliaments.

4. The proposal does not challenge the dominance of market forces in the EU. This means that member states will remain under pressure to adopt neoliberal economic policies that prioritise the interests of big business over the needs of workers and the environment.

5. As an additional safeguard to the debt reduction path, an annual minimum benchmark adjustment of 0.5% of GDP is imposed when the deficit exceeds the GDP reference value. This means even harsher sanctions. Moreover, public debt at the end of the plan must be below its initial level.

We need new rules based on social and ecological sustainability: To end austerity and promote social and climate justice, we need to prioritise public investment, quality jobs, and vital public services. We need rules that challenge market forces’ dominance and promote a just transition to a sustainable and equitable future for everyone in Europe.

It is time to remind politicians in power of their duties: to rewrite the rules to ensure that capital, businesses and governments work for people and planet.

Further reading:
EU debt rules: austerity in disguise.
End of the road for the EU’s Stability and Growth Pact? (pdf 2,4MB)
30 years of the Single Market: Can I kick it?