Dr. Dirk Ehnts:

I thank the committee for the invitation and I hope that I can be heard.

In a communication from 19 October 2021, the Commission relaunched the public debate on the review of the EU economic governance framework, taking stock of the changed circumstances following the Covid-19 crisis. Eleven key issues for the public debate are identified, all posed as questions.

The first questions reads, "How can the framework be improved to ensure sustainable public finances in all Member States and to help eliminate existing macroeconomic imbalances and avoid new ones arising?" From an economic point of view, this is an interesting question. There is no definition of sustainable public finances. I would argue that there cannot be one. A central bank is the monopoly supplier of money and it executes a government’s payments by creating money. The President of the European Central Bank, ECB, Christine Lagarde, confirmed last year that neither the ECB nor the national central banks, or the Eurosystem, can run out of euro. Therefore, as long as the Eurosystem is buying up sufficient government bonds within the pandemic emergency purchase programme, PEPP, eurozone governments like those in Ireland, Italy or Greece will not and cannot run out of money. Since deficit limits are off as well - the Stability and Growth Pact, SGP, was deactivated in the spring of 2020 - there is no punishment for overspending, however overspending would be defined. Therefore, there is no limit to the amount of euro a government in the eurozone can spend today. This seems to be working rather well.

In June 2021, the Commissioner for the Economy, Paolo Gentiloni, stated “Strong common fiscal rules should take into account two problems: First, the reality of our different fiscal situation in public finance [meaning the eurozone countries] and second, the need that we have to support growth and sustainable growth”. There is broad consensus that the framework does not work. Why would it be so bad when the old rules return? Ireland would return to drafting a budget with a fiscal deficit in mind, instead of addressing the environmental crisis, social deficits and other ills. The Irish unemployment rate as of October 2021 was 5.2%. This means that there are plenty of workers available who could be employed to increase, for example, green public investment. On returning to the old rules, that could not happen.

Olivier Blanchard, the former International Money Fund, IMF, chief economist, called for fiscal standards to replace fiscal rules that are one-size-fits-all. It would be a step forward to revise the economic governance framework in order that the public deficit and debt limits are replaced by employment and European Green Deal mission targets. If that does not find a majority, then green investment should perhaps be exempted from calculations of public deficit and public debt. Upcoming changes in the global tax code might reduce Irish GDP and hence increase the public deficit and public debt-to-GDP ratios. It makes no sense to cut Government spending in Ireland, just because some multinational companies switched their headquarters. The framework should be more flexible to deal with issues like this.

The economic governance framework should reflect, then, that government spending is essential to generate employment and address society’s ills. The wage growth of public workers is a key determinant of the rate of inflation. The existing rules have been too tight. The ECB did not hit its inflation target in the past decade because wage growth and government spending were too low. Also, the eurozone’s unemployment rate never fell below 7%. That figure is too high. The rules need to be more expansionary and mission-oriented. They also need to be tailored to the specific conditions in which the eurozone countries find themselves.