The Frugals, the Free-Spenders and the Friendly Hawks: In Search of a New European Fiscal Policy Consensus

 

Since the activation of the General Escape Clause of the Stability and Growth Pact (SGP) in response to the COVID-19 pandemic in 2020, EU Member States have enjoyed a greater degree of flexibility in applying fiscal policy in response to the economic challenges of the pandemic than they had done during previous periods of crisis. However, with the EU set to discontinue the activation of the General Escape Clause from the beginning of 2023, the Union faces an important and potentially acrimonious debate between the ‘frugals’, the ‘free-spenders’ and the ‘friendly hawks’ on the future of its fiscal rules.  

The debate will require a level of compromise between governments who favour a return to the pre-pandemic fiscal rules, those who strongly favour greater flexibility in applying the rules, and Governments whose positions lie somewhere in between – or are ambiguous at the time of writing.  

Reaching an agreement will be crucial for Member States to obtain some level of certainty regarding their future fiscal positions. Moreover, the outcome of the debate in advance of the suspension of the General Escape Clause will be a key litmus test. It will highlight the degree to which the pandemic has shifted the conventional economic policy priorities and thinking of certain Member States, most notably Germany and the so-called ‘frugal’ countries, traditionally including Austria, Denmark, the Netherlands and Sweden – and occasionally Finland.