Dr. Dirk Ehnts:

I believe the political situation has already changed a bit. Even before the pandemic hit, roughly one third of the countries had debt levels of more than 100% of GDP. In 2019, ten countries in the European Union broke the rules of the Stability and Growth Pact, which is more than a third of the countries. Only Romania was punished in 2019 so nine countries were not punished. It seems like the European Commission politically understands that one cannot enforce the rules. The rules do not even make sense in good times. 2019 was a good year overall for the eurozone economies but even then a third of the countries broke the rules and these are fair-weather rules. In the crisis the first thing that we did was get rid of the rules. Consequently, I think that the political negotiations will be about the deficits that countries will be allowed to run. In a way, it is a strange game because the deficit is not under one's control. One can control government spending, more or less, but if there is a financial crisis then tax revenue goes down and that is not one's fault as a government.

Choosing deficits is a bit awkward and one thing that could be a step forward would be to say let us negotiate government spending directly, which is the discretionary part. To some extent we are already seeing a kind of political line-up. There are the frugal four counties that are a little bit crazy and say they want the old rules back but other countries such as Italy and Spain - Italy and France are now working together - say that countries need to talk. One should talk about government spending and discuss how much is affordable but then somehow negotiate within the eurozone. If that cannot be done then countries can negotiate public deficits that must be hit. These kinds of discussions have already taken place. In 2014, the governments of Spain and Portugal broke the fiscal rules and were not punished, which was the start of it. Somehow there must have been negotiations, which I guess took place behind closed doors, where the European Commission say that if the budget deficit is not larger than a certain amount a government would not be punished. I think that is the political game now.