Why does the Stability and Growth Pact not promote stability or growth?

As the EU’s fiscal rules are being reformed, investment in green, digital and social public goods should be excluded from the debt calculations, argues André Sobczak.

André Sobczak is the secretary general at Eurocities.

There is a double bind in Europe at a time when we cannot afford to have our hands tied. There is an urgent appeal to move on climate, social and digital resilience, and invest in our future, so that in 10 or 50 years we are not forced to look back with remorse at our failure to act.

The ambition is there, and yet one look at the actual spending in Europe shows that the money is not. One look at the fiscal regulations shows that they not only fail to support these ambitions, but are actively holding them back.

As the importance of investing in our future grows more urgent by the day, the level of actual long-term investment available to our cities continues in the downward spiral that it has been caught in for over 10 years. These are not just numbers: The real ramifications of this trend are that the green, digital and social infrastructure we need to build locally to achieve Europe’s stated aims is not there, and will not be there unless we have a rapid adjustment.

Europe’s Stability and Growth Pact, currently under review, can limit large-scale investment in public goods, especially at the local level where it is most sorely needed. This pact checks debts and deficits, which is all well and good when it comes to general spending, but there needs to be a different approach when it comes to long-term investments that will allow Europe to be sustainable and socially and digitally resilient.

Many cities have large debts at the moment due to necessary spending during the Covid pandemic. Are we going to ask climate change to take a break while we reorganise our finances?

Under current EU rules, spending on office supplies is treated in the same way as spending on solar panels. What I am declaring on behalf of Europe’s cities is that these are not equivalent, and that any system that treats them as such needs to be rebooted – and fast. New, reformed fiscal rules could be supported by a European budget that funds key European public goods.

A further hazard of the current system is that governments are at liberty to wrack up debt in boom times, when there should be little need to do so, while they’re compelled to be tight-fisted during times of economic crisis, just when a boost in government spending is needed.

The European Investment Bank found that 70% of cities lacked the resources for necessary investments in social, digital and climate infrastructure. If we want to fill this huge investment gap, and ensure that we do not leave people in the dark during times of crisis, it’s true that public spending will not be enough.

However, what we have seen with cities investing in innovative and efficient solutions all over Europe is that when local government spends, private funders follow suit. When we back smart ideas, private actors get on the bandwagon, and together, we really do have the power to make a difference. Our actions also centre spending on people, to plan for a socially sustainable future. But city spending has to be enabled first, or the first domino won’t get knocked over.

The necessary changes at the EU level may take time, but we need an immediate response. As a stop-gap solution, underspending in EU funds should be directed to local social, green and digital investments. The EU must create a new programme that supports cities to make the most of what they have by blending sources of finance and leveraging private funding with public investments.

Nevertheless, I reiterate that such measures will only do as an interim solution. Long-term success requires long-term planning and investment. We need a complete rethinking of the EU fiscal rules.

The Stability and Growth Pact must promote stability: Investment in green, digital and social public goods, carefully assessed according to the appropriate taxonomy, must be excluded from the debt calculations. The Stability and Growth Pact must promote growth: Long-term investment must be treated differently from normal spending, giving cities more room to finance vital infrastructure and to future-proof public services.

Only once the pact is transformed into a counter-cyclical economic support mechanism, rather than one designed to amplify economic booms and downturns, only once it is flexible enough to allow real long-term thinking will it be able to protect and reinforce the long-term interests of Europe.