The reformed EU fiscal framework in action: Providing sufficient space and incentives for public investment and the green transition?

This policy paper analyses key features of the reformed EU fiscal framework, the so-called national medium-term fiscal structural plans (MTPs), as well as two flexibilisation clauses of the new rules: the ‘permanent’ extension clause of national fiscal adjustment paths in exchange for reforms and investments, and the ‘temporary’
national escape clause for defense spending.

It studies the extent to which Member States have made use of these two flexibilisation clauses and the consequences of their activation for public investment and green reform and investment measures. The paper finds that the new central debt sustainability analysis (DSA) framework, the extension clause and the national escape clause for defense spending provide significant support for maintaining or even raising public investment levels.

This is in stark contrast to the effect EU fiscal rules had in the aftermath of the Great Recession and the eurozone debt crisis, when public investment shrank sharply.

However, while the new extension clause was designed to incentivise Member States to develop major reforms and investments in line with EU priorities, the analysis
of the measures included in national MTPs reveals a major lack of ambition, especially regarding the green transition. To further develop the EU fiscal framework and strengthen its capacity to incite public investment and measures to accelerate the green transition, this policy paper makes three sets of recommendations:

(1) remove the counterproductive deficit and debt safeguards;
(2) revise the incentive structures of the rules’ extension clause together with the next multi-annual financial framework of the EU to strengthen debt sustainability and the achievement of common priorities;
(3) improve the DSA framework by better accounting for the impact of investments and reforms on growth and the effects of climate nonaction on public budgets.