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Europe Is Fighting Over Its Fiscal Future

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22.09.2021

As the coronavirus is largely brought under control in Europe and battered economies finally start to rebound, a major political battle is looming over what a post-pandemic European Union should look like.

A heated debate is getting underway within the bloc on whether the spending and debt restrictions on member states—suspended in March 2020 due to the COVID-19 crisis—should be brought back or substantially loosened for the long haul. At stake is a battle for Europe’s financial soul between fiscally conservative northern countries like Germany and the Netherlands and southern European countries like Spain, France, and Italy that have long demanded more spending flexibility.

“The stakes are quite high, mainly because we now have the real opportunity for a change to the rules in a way that we haven’t seen before,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

As the coronavirus is largely brought under control in Europe and battered economies finally start to rebound, a major political battle is looming over what a post-pandemic European Union should look like.

A heated debate is getting underway within the bloc on whether the spending and debt restrictions on member states—suspended in March 2020 due to the COVID-19 crisis—should be brought back or substantially loosened for the long haul. At stake is a battle for Europe’s financial soul between fiscally conservative northern countries like Germany and the Netherlands and southern European countries like Spain, France, and Italy that have long demanded more spending flexibility.

“The stakes are quite high, mainly because we now have the real opportunity for a change to the rules in a way that we haven’t seen before,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

The north-south rift is a familiar one in European politics. It has led to deep resentment in the past, such as when painful austerity measures aimed at fiscal consolidation were imposed across the bloc in the aftermath of the 2008 financial crisis. It reared its head again last spring, when Germany and the Netherlands at first resisted emergency measures to jump-start European economies that were hammered by the pandemic and subsequent lockdowns.

During the pandemic, as governments increased their borrowing to keep workers and businesses afloat, public debt skyrocketed across the union. By the first quarter of 2021, average EU public debt had grown by 14 percent compared to one year earlier. Germany’s debt topped 70 percent of its GDP while France’s reached 118 percent, Italy’s nearly 160 percent, and Greece’s an eye-watering 200 percent.

“The stakes are quite high, mainly because we now have the real opportunity for a change to the rules in a way that we haven’t seen before.”

The eurozone has long been premised—at least on........

© Foreign Policy


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