Greening EU Fiscal Rules

Wednesday, February 21, 2024, at 14:00-15:30 Vienna time (CET)

Zsolt Darvas, Senior Fellow, Bruegel and Corvinus University of Budapest 

Markus Eller, Senior Economist, Joint Vienna Institute

On February 21, 2024, the Joint Vienna Institute (JVI) delivered a webinar aimed at exploring the sustainability aspects of fiscal rules, with a particular focus on both fiscal and environmental sustainability. The central inquiry of the discussion revolved around assessing whether fiscal frameworks possess the capacity to facilitate vital investments in climate action while upholding fiscal discipline. The webinar featured a presentation by Zsolt Darvas, Senior Fellow at Bruegel and Corvinus University of Budapest, based on recent Bruegel assessments, and was moderated by Markus Eller, Senior Economist at the JVI.

Amid fiscal consolidation efforts, it is often observed that long-term investments bear the brunt of cuts over current expenditures. This trend raises concerns, particularly given the increased macroeconomic volatility, already elevated debt levels, and the urgent need to fund the green transition of our economies. Zsolt Darvas underscored that the EU is confronted with substantial green investment needs, estimated at approximately 2% of GDP per year, encompassing both public and private investment, to achieve emission reduction targets by 2030. In response, it becomes important to explore innovative solutions that can reconcile fiscal prudence with green public investment.

On February 9, 2024, the Council and the European Parliament reached a provisional political agreement to reform EU fiscal rules. This agreement introduces a primary incentive for public investment: granting governments additional time for fiscal adjustment contingent upon the presentation of a credible reform and investment plan. As discussed in the webinar, the extension of the adjustment period, potentially lengthening it from four to up to seven years, could significantly reduce the annual average fiscal adjustment requirements, potentially by up to 0.5% of GDP for certain countries. However, this approach to incentivizing green public investment is not without its challenges. Firstly, the newly introduced numerical safeguards may limit the extent to which high-debt countries can finance public investments through debt during the adjustment period. Secondly, the requirement for an increase in nationally financed public investment implies that EU countries would need to undertake greater fiscal consolidation in non-investment components of the budget, potentially posing a formidable challenge for political economy reasons.

Therefore, Mr. Darvas and his colleagues at Bruegel proposed a potential enhancement called a “fiscally responsible green investment rule”. This rule aims to facilitate a temporary surge in green investments to meet emission reduction targets by 2030. According to this proposal, the green public investment program would last one year less than the adjustment period’s duration, while being exempt from numerical safeguards—a stipulation that, nonetheless, would apply to the remainder of the budget. By the final year of the adjustment period, all conditions would be required to be met. Moreover, only investments endorsed by the Council and overseen by the Commission could be excluded. Numerical simulations demonstrate that this temporary investment push, calculated with 0.5% of GDP per year for six years, would result in minimal delays in debt reduction for most countries.

Given that a political agreement has already been reached, it was stressed that the opportunity to introduce such a fiscally responsible green investment rule has been missed. Nevertheless, the discussion in the webinar shed light on the importance of exploring innovative policy solutions and strategic funding mechanisms. This includes reassessing the balance between fiscal discipline and the imperative for green investment, also considering additional spending requirements coming from areas like defense and security. While the reform of the EU fiscal framework represents an important step towards more effectiveness, it is evident that addressing the gap in green investment requires collective efforts to finance this type of investment. The discussion referred to adequate forms of public-private partnerships, improved incentives for private investment, but also a stronger case for EU funding given cross-border benefits of green investment. 

Markus Eller, Senior Economist, JVI


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