The Dutch economist Jan Tinbergen’s name is immortalised in the rule every economics student must — and every policymaker should — learn: you need one policy tool for each policy goal you are trying to achieve.
The Tinbergen rule is useful to keep in mind as the EU prepares to reform its fiscal rules, informally known as the stability and growth pact. In its current form, the pact has no instrument to target growth at all (unless you count limited suspensions of the rules). Indeed, private and public investment hit rock bottom in the last decade, when European politics was mostly heavily steered by fiscal discipline.
Conversely, the pact contains too many instruments targeting “stability”. Even the most hawkish of eurozone finance ministers have complained that it is too complex. And “stability” is a misnomer; the pact’s tools may limit public borrowing but they don’t guarantee stability, as Spain and Ireland’s experiences in the eurozone sovereign debt crisis showed.
Until recently, EU leaders have been deadlocked between high-debt states and “frugal” ones but there is now accelerating movement. Governments have published informal position papers. When finance ministers met in Prague this month, I am told their shadow boxing around reform became “less shadow and more boxing”. They expect a detailed reform proposal from Brussels next month.
Why is momentum for reforming the rules building now? One reason, paradoxically, is their current suspension. The “general escape clause” was first triggered in the pandemic and then extended after Vladimir Putin’s assault on Ukraine. When governments start planning their 2024 budgets next year, they will need to know what rule book to go back to.
They are increasingly seeing eye-to-eye on what this should be. The tragic clarity of Putin’s intentions, and his willingness to weaponise gas, have focused Europe’s attention on geopolitical security in general and energy security in particular. The need to invest more — in frontier technologies to gain “strategic autonomy” and in digital and decarbonised infrastructure for energy independence — has moved from long-term aspiration to immediate security imperative.
That sense of urgency has produced an impressive agreement that the rules must encourage investment in Europe-wide public goods such as defence capabilities, electricity generation and energy transmission. Even Germany’s government emphasises the need for investment.
The security imperative has reconfigured the politics as well. The EU’s northern flank of smaller liberal states were traditionally strictest on both security and budget questions. Putin’s belligerence has brought home that you cannot be hawkish on both at the same time. They have largely, and wisely, decided to put geopolitical hawkishness first. The result is a much more constructive attitude on budget policy, including surprising new constellations such as a joint Dutch-Spanish position.
That raises two questions. First, will Germany play ball? The answer is probably yes. It has been showing more flexibility, from its coalition’s governing programme last year to its statement of principles for reform this summer. No longer shielded by the ultra-hawkish group of northern states, it is likely to move further.
Second, will the reforms achieve enough? Here, the answer is probably no. The likely compromise will retain the overarching legal structure of the rules while modifying their substance. There is much support for replacing structural deficit targets with paths for public expenditure, and budding agreement on tailoring debt reduction for each country. These are improvements but they hardly amount to instruments dedicated — à la Tinbergen — to boosting growth or even investment.
But an optimal outcome is not on the cards. What can be hoped for is that imperfect but more country-specific rules will improve the political dynamic. Many capitals argue that more national input into how the rules apply and a greater effort to agree about what counts as good public spending would increase compliance. That could create incentives to prioritise investments that benefit the EU as a whole.
In all this, the experience of the EU’s recovery fund will matter hugely. If countries’ deployment of common resources are seen as a success, it will boost trust and make the fiscal rule book more growth-friendly. Failures to meet agreed milestones, let alone failures of the rule of law, will do the opposite. Rules, often a substitute for trust, in this case depend on it if they are going to work.
