A socially just and environmentally sustainable EU economic governance? [Promoted content]

Although intended to be an effective information-driven mechanism for monitoring and steering Member States’ public finances, the European Union’s economic governance framework has evolved into a complex structure of detailed rules and exceptions that, apart from a brief respite during the Covid-19 pandemic, remains based on an austerity-driven approach.

This approach has forced Member States to consolidate their finances during a recession, to keep supposedly ‘wasteful’ welfare states in check and to limit investment in urgent priorities such as the twin transition. The economic governance framework has had a negative impact on Member States’ social and employment policies and, due to an asymmetry of competences, social objectives have been continuously subordinated to the imperatives of fiscal discipline and economic competitiveness.

The EU’s fiscal rules are in urgent need of deep reform. To address long-standing criticisms, the European Commission launched a comprehensive review of the economic governance framework in 2020 and published legislative proposals in April 2023 aimed at strengthening public debt sustainability and promoting sustainable and inclusive growth.

In its recent publication “Revised EU economic governance: Are the European Commission’s proposals socially just and environmentally sustainable?”, written by Tommaso Grossi, Alessandro Liscai and Laura Rayner, SOLIDAR assesses that, regrettably, these proposals would not make the EU economic governance more responsive to environmental and social issues.

Long-term environmental and social sustainability objectives would remain secondary to medium-term fiscal sustainability, with limited recognition of the interplay between them. The proposals emphasise continuity with many of the long-standing weaknesses of the framework and neglect the positions and ideas put forward by the social partners and civil society in the public consultation.

SOLIDAR believes that the EU’s economic governance framework must take a more forward-looking and holistic approach. It should focus on the well-being economy, which puts our human and planetary needs at the centre of its activities, rather than economic growth as an end in itself. SOLIDAR therefore proposes six key policy recommendations:

Introduce a golden rule exempting green and social investments from the calculation of national deficits. In the short term, the use of external independent evaluators and the coverage of green and social investment projects already approved under the Recovery and Resilience Facility could be a valid starting point for classifying exempted green and social investments. In the longer term, this could be followed by an amendment to the Treaty to provide a more explicit definition of the investment clause.

Establish a permanent central fiscal capacity to support green and social investments, to finance European public goods and, most importantly, to create a level playing field between Member States in the wake of the Recovery and Resilience Facility after 2026.

The provision of specific types of European public goods is crucial to implement the twin transition, build the resilience needed to face future crises and generate positive externalities that benefit society as a whole. In this sense, the idea of creating a European Sovereignty Fund or strengthening the Just Transition Fund can be an important step forward.

Reform the European Semester to coordinate the implementation of a just transition, bringing together the agendas of social justice, climate action and environmental protection and restoration, and ensuring consistency in EU analyses and recommendations to Member States. It should set targets and monitor progress across the full range of EU objectives, including the implementation of structural reforms and investments, ensuring their alignment with the principles of the European Pillar of Social Rights and linking EU funding to their achievement.

At a minimum, the instrument should improve coordination between Member States, increasing transparency and properly monitoring the implementation of national Fiscal Structural Plans to achieve a better balance between economic, social and environmental objectives. To achieve this, the governance instrument could be disentangled into a separate regulation, which would be easier to amend and more frequently reviewed.

Integrate the Social Convergence Framework, introduced by the Spanish and Belgian EU Presidencies, which aims to promote upward social convergence and the pursuit of social priorities. The adoption of a comprehensive and integrated scoreboard that incorporates environmental and social aspects of progress offers a more nuanced and inclusive perspective on economic governance. In this respect, the Well-Being Economy Framework can provide useful guidelines for strengthening the Social Convergence Framework.

Establish a Well-Being Economy Framework to accompany the revision of the economic governance framework. In line with the 2030 Agenda for Sustainable Development, there is now a strong, evidence-based case for going ‘beyond GDP’, incorporating much broader policy tools and initiatives (in the areas of environmental sustainability, health, education, gender equality, social protection and redistribution) and proposing statistical measures that bridge the gap between standard macroeconomic statistics and indicators with a more direct bearing on people’s lives.

A revised economic governance framework should include well-being indicators that provide a more comprehensive picture of societal progress, such as work-life balance, income inequality, childcare provision and take-up, and job insecurity. It must also require Member States and the European Commission to set out each year how well-being objectives will guide the budget, and to make spending decisions that integrate environmental and social objectives with their fiscal priorities.

Expand the role of Independent Fiscal Institutes to take on additional tasks related to the achievement of green and social objectives, such as assessing the long-term impact of climate-related fiscal risks on national budgets as well as identifying national green and social financing needs and quality investments. They can also help align national policies with broader European sustainability frameworks, such as the European Pillar of Social Rights.

SOLIDAR advocates for a more ambitious and transformative approach to EU economic governance. With a view to debt sustainability, the EU must prioritise the necessary investments in the twin transition, including significant social investments. It is therefore essential to design a new fiscal framework that rectifies the shortcomings of the past and aligns with the principles of progressiveness, social justice and environmental sustainability. This framework should build on existing frameworks such as the European Pillar of Social Rights and embrace new ones, such as the Well-Being Economy Framework.

Follow this link to read the full policy recommendations and analysis.