The social dimension of the EU’s economic governance review

The EU needs to take the opportunity to strengthen the social dimension of its economic governance regime, argue Estrella Durá Ferrandis and Alba Huertas Ruiz.

Estrella Durá Ferrandis is a Spanish Socialist MEP; Alba Huertas Ruiz is political advisor to the Spanish Socialist delegation in the European Parliament.

The EU’s “economic governance” system was implemented to enforce the Stability and Growth Pact, and includes fundamental elements such as the six-pack and two-pack legislative reforms and the European Semester, which is the annual cycle of economic, fiscal, employment, and social EU policy coordination. It has gradually evolved.

Times have changed since the inception of this framework, with notable progress being made on both the economic and social fronts. In response to recent crises, innovative solutions have supplanted austerity measures. After the COVID-19 outbreak, the EU temporarily suspended fiscal rules to help countries deliver financial assistance and cushion the impact of the pandemic. However, this commendable effort led to heightened budget deficits and public debt levels, surpassing even further the limits set by the European Commission.

The year 2023 marks the anticipated return of European fiscal regulations, and the Union strives to reinforce the social dimension of economic governance by betting on broader fiscal flexibility and investments to enhance well-being and mitigate economic recessions.

In light of this, the Commission unveiled a proposal last April for the revision of fiscal rules, aimed at reducing debt levels in a more inclusive and sustainable manner. Composed of two regulations and one directive, the reform looks to give EU countries more leeway in how they reduce public debt.

This approach seeks to avoid situations where debt reduction happens too rapidly in order to give space for public investments. This is pivotal for successfully navigating the twin transitions and is a plausible aspect of the proposal, promising a more realistic and gradual debt reduction that is perfectly compatible with economic growth and job creation.

The Maastricht criteria of a 60% debt ratio and a 3% GDP deficit persist, but member states would gain more flexibility and longer multiannual adjustment periods to reduce debt in terms of net expenditure. This means countries would have up to four years to bring their deficits below 3% of GDP and keep debt at prudent levels. Governments would also have the possibility of pursuing a seven-year fiscal adjustment path if they commit to reforms and investments related to the European Pillar of Social Rights, and the green and digital transitions.

Despite the proposed rules acknowledging the importance of public investment to boost growth and strengthen the social dimension, certain technical criteria have sparked disagreements in Brussels. During the debt reduction periods, if a member state’s deficit remains above the 3% GDP limit, they would be required to reduce it by 0.5% of GDP annually, with net public expenditure growth constrained below expected medium-term output growth.

This pro-cyclical aspect of the rules requiring mandatory deficit reduction could potentially push high-debt ratio countries into fiscal austerity, limiting public investment and social progress. Indeed, cuts in public spending might hinder the achievement of Social Pillar targets, especially during economic downturns.

There is still room for discussion, with different proposals on the table. With respect to the social dimension, the European Parliament approved a forward-looking Semester report in March, calling for an inclusive socio-ecological transformation of the economy, a re-evaluation of the economic governance architecture, and the inclusion of more mandatory social targets in fiscal plans based on quality and solidarity.

The text includes several important proposals, such as a social convergence framework to ensure that fiscal adjustment programmes do not have negative social consequences, along with other mechanisms aimed at ensuring sustainability and strengthening social welfare systems. The overarching aim is to prevent social, economic, and environmental imbalances while adapting equitably to new transitions.

Within the Brussels bubble, the aspiration is to conclude this revision before next year’s EU elections—a challenging but not insurmountable timeline. Under the Spanish presidency, priority is being accorded to strengthening social aspects and facilitating the review of economic governance, allowing member states to finance policies and public services while upholding fiscal fairness and stability.

As negotiations loom on the horizon, the only certainty is that the Union is willing to undertake a change in direction, opening the door to essential and automatic stabilisation mechanisms that can foster a more sustainable growth model, reduce vulnerability to future shocks, and elevate the social dimension to a prominent position on the chessboard.