The EU faces a stark choice: invest boldly in a sustainable, competitive future or risk repeating the mistakes of austerity, jeopardizing jobs, industry, and its global standing.
When European Commission President Ursula von der Leyen presented the political guidelines for her new mandate last summer, she announced that “this will be an investment Commission”. The talk around the need for more investments has completely scaled up since then. Mario Draghi put the cherry on top of the cake in his report on competitiveness by calling on the EU to invest 5 per cent of GDP every year in decarbonising and digitalising the economy in order to make it more competitive. Almost everybody from left to right seems to agree that more ambitious investments are needed. But big misunderstandings arise on how to finance them.
Nevertheless, the only real thing happening on ambitious investments in the EU at the moment is the talking, because there are no new initiatives on creating the necessary funding. Meanwhile, the only concrete measures in the making seem to be those on fiscal consolidation, announcing a new wave of austerity. The contradiction between the walk and the talk could not be greater. Those of us who lived in the aftermath of the 2008-09 financial crisis are experiencing a strong ‘déjà vu’ effect, as past mistakes are about to be repeated. It might not be wrong to assume that Draghi has recognised some of these past mistakes while he was the ECB President and is now raising some red flags towards the opposite direction with his report pushing for investments.
Over a decade since the failed experiment of austerity, we are now reading again recommendations for fiscal consolidation and structural reforms in reports from the big financial institutions (like the OECD or the IMF) and from policymakers (recent Eurogroup statement). The fiscal consolidation and structural reforms imposed after the financial crisis led to a self-inflicted economic recession in the EU and had the opposite effects to those initially intended. It resulted in a dramatic contraction of both public and private investments, as Member States had their hands tied by the Stability and Growth Pact, which prevented governments from supporting private investments through public incentives.
Meanwhile, demand dropped substantially, especially in those countries most affected by the crisis, as a result of wage freezes or wage cuts, which forced workers to pay for a crisis that they did not create (but that was created by irresponsible corporate strategies of big banks, which was enabled by deregulation). The US has never adopted frugal economic governance rules (like the EU Stability and Growth Pact), betting instead on investments to overcome economic crises. And this clearly works much better than austerity, given the persistent gap between the US and the EU in terms of productive investment and the risk it entails for the EU’s competitiveness.
Trade unions were hoping that the EU has finally understood this, with the positive response to the COVID-19 crisis that led to unprecedented support through programmes like Next Generation EU or SURE. But unfortunately, this response risks becoming a good one-off memory with the reformed economic governance rules coming soon into force. The new rules will severely erode public investments in most Member States, as acknowledged by the European Investment Bank: “the reinstatement of fiscal rules is likely to result in fiscal consolidation, which tends to affect public investment disproportionately. Historical data for 16 OECD countries show that such fiscal retrenchment usually has a disproportionate and long-lasting effect on public investment.” With eight Member States being exposed to an excessive deficit procedure, the impact of EU fiscal rules on government spending will soon materialise. This might severely undermine a series of key EU political objectives, since research shows that the new rules allow only three Member States to make the necessary social and green investments to reach their climate targets.
Another wave of fiscal consolidation and structural reforms risks being the ultimate fatal ingredient of what is slowly but surely becoming a perfect storm. Particularly concerning is that the Eurogroup’s statement comes at a time when more and more companies are announcing plant closures and job cuts across Europe. The big European companies in the automotive sector, which count 13 million workers along the value chain, have been in the headlines over the past weeks. But announcements are also reaching us from the chemicals, basic metals, aerospace, and energy sectors. We fear a cycle of restructuring reinforcing itself unless policies that promote investments with social conditionalities are established. Now is the moment to invest, not to cut.