17. June 2020
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Sustainability and Prosperity Pact

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The EU treaties’ fiscal rules focus narrowly on avoiding excessive deficits. These regulations reflect a widely-held but flawed view of economic sustainability, which ignores the growth side of debt sustainability, the social and environmental preconditions of stable and longer-term economic prosperity, and the feedback loops from fiscal policy to an economy’s potential output. As a result, this framework enforces austerity programs which cut spending on care, public health and education, and thereby exacerbated the current COVID-19 crisis, while depressing potential output and failing to reduce debt levels.

In addition, the current EU fiscal architecture suffers from several institutional shortcomings. Rule enforcement is complex, full of exemptions, and largely isolated from the EU’s public sphere. Guidance on directing fiscal policy towards sustainable growth is weak to non-existent. After Corona, the time may hence have come to replace the Stability and Growth Pact. In its stead, member states could agree on a Sustainability and Prosperity Pact, centred on a more multidimensional evaluation of fiscal policy, and more effective coordination between individual member states.

This revised fiscal architecture would promote sound budgetary policies in line with the long-term development of the EU’s economic and social capacities. A revised Article 126(2) TFEU would not only focus on (1) budgetary discipline, but list as equally important priorities (2) environmental sustainability, (3) balanced trade, (4) non-predatory taxation policies, and (5) long-term productive investment, including investment in education and care. The revised Article 126 and the rules based on it would continue to be enforced by the Commission with an eye on identifying “gross errors”. However, a transparent multidimensional Sustainability and Prosperity scoreboard replaces the Stability and Growth Pact, the Macroeconomic Imbalances Procedure and the European Semester. Well-being indicators, disaggregated by gender, race and other salient dimensions, could replace GDP growth targets as overarching policy goals. The European Parliament could evaluate the resulting Sustainability and Prosperity scores, which would in turn inform the distribution of the EU budget and the application of EU state aid rules. To promote democratic participation, finance ministers could explain their budgetary policies in a televised Eurovision Fiscal Festival.

This proposal links to Democratizing WorkFair and Effective Wealth TaxationEuropean Investment Authority, and Onshoring Essential Industries, as well as to Updating National Accounting.

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