European policymakers have been grappling with significant economic decisions in recent weeks. The European Central Bank (ECB) recently convened to discuss what would become its tenth consecutive interest rate hike. Simultaneously, the European Union’s Economic and Financial Affairs Council engaged in negotiations over reforms to EU fiscal rules, although without conclusive results. Additionally, European ministers, central bank governors, and regulators met informally to deliberate on economic governance and the coordination of fiscal and monetary policies. Despite these extensive discussions, substantial changes seem unlikely.
The COVID-19 pandemic prompted European authorities and central bankers to implement unprecedented and innovative economic responses. However, the surge in public debt and recent inflationary pressures have unsettled policymakers. Some EU member states, particularly those hesitant about the significant pandemic spending, are now advocating for a return to austerity measures. The ECB has also adopted a more hawkish stance. This shift raises concerns about whether Europe is experiencing temporary reform fatigue or if it is reverting to previous, more restrictive economic policies.
The European Commission acknowledges that an asymmetric federation—with a central bank but multiple fiscal authorities operating under national fiscal rules—tends to have a deflationary bias. This situation puts the EU at a disadvantage compared to countries like the United States, which can employ a more supportive mix of policies during crises. Despite this recognition, there appears to be a lack of political will to address these structural issues.
Proposed reforms to EU fiscal rules by the European Commission illustrate this challenge. While these proposals are less stringent than the existing Stability and Growth Pact, they still contain undesirable pro-cyclical elements. This means that in a period of weakening economic growth, the EU may enforce sharp fiscal consolidations. If these reforms are adopted in their current form, the EU would need to increase its overall structural primary surplus by an estimated 0.65 percent of GDP annually from 2025 to 2028. The required adjustments are even larger for countries like France and Italy.
The potential return to austerity in Europe has significant implications for the global economy, including Asian markets. Tightening fiscal policies during periods of economic slowdown could dampen global demand, affecting exports and investment flows worldwide. Asian economies, many of which are closely linked to European markets through trade and investment, may feel the ripple effects of Europe’s fiscal decisions.
As Europe navigates its fiscal challenges, policymakers around the world will be watching closely. The debates highlight the importance of balanced fiscal policies that support economic growth while maintaining fiscal responsibility. For Asian economies, Europe’s experience underscores the need for flexible and coordinated policy responses in the face of economic uncertainties.
Reference(s):
cgtn.com
