EU austerity 2.0

In late February, the EU Commission published the mid-point evaluation of its Recovery and Resilience Facility (RRF) but within hours the EU had voted to severely cut it. The evaluation had set out how the €225bn investment made so far has led to stronger economic growth, record low unemployment and been a “considerable boost” to the green transition.

“We have seen funding for energy efficiency, renewable energy and digitalisation projects like never before,” said Ursula von der Leyen lending her support to public investment, presenting it as a positive development. Yet, the same day, the European Council approved new economic governance rules which would place severe limits on future public investment.

The rules, which were proposed by the Commission and made even more severe by the Council, would require member states to reduce their deficits to 1.5 percent of GDP. That would force member states to collectively cut their collective budgets by more than €100bn in the first year of their implementation alone. The cuts can be spread seven years but there are conditionalitys, such as anti-worker economic reforms – surprise, surprise!

Of course, this will lead to slower economic growth and more job losses – not exactly what the RFF authors had in mind. Private sector investment has already fallen by five percent since the pandemic. Profits have been siphoned-off in record dividend payments as the rich get richer, but the ECB’s decision to raise already record interest rates to record levels has also contributed to the fall in investment. Cutting public investment at this juncture would all but guarantee another recession.

Economic think-tank Bruegel has joined trade unions in calling on policymakers to ensure that spending needed to meet the EU’s own social and climate targets was not made impossible by the rules. Nobody was listening!

According to Esther Lynch, general Secretary of the ETUC, “the coincidental timing of the adoption of these rules proved that policy is being made on the basis of political dogma and not what is working in practice. Quality jobs, a green economy and a fairer society is being sacrificed to satisfy spreadsheet economics. The EU’s own analysis has made it clear this is economic self-sabotage”. She pointed out that “The last dose of EU-mandated austerity made a significant contribution to the rise of the far-right across Europe, recent academic research found”.

The RFF, which was established to limit the economic fallout of the pandemic, is set to end in just two years’ time. The ETUC has called for the RFF to be replaced with a new and permanent EU investment instrument to ensure that at least once source of public investment is still open and points out that Member States also need to bite the bullet and increase taxation rates of the richest individuals. If not, we’re in for a rough ride over the next years.