Bertelsmann Stiftung recommends reform of European sovereign debt rules
Growth-oriented consolidation seen as preferable to inflexible Fiscal Compact
According to a recent study conducted by the Bertelsmann Stiftung and Prognos AG, the Fiscal Compact signed by 25 EU member states in early March leaves much to be desired when it comes to promoting economic growth. The study “Maastricht 2.0” criticizes the Compact’s debt brake rules, which are seen as being too restrictive in the long term and too lax in the short term. And they do not take into account national peculiarities.
"Our recommended reform of the sovereign debt rules, which we refer to as Maastricht 2.0, would do far more to promote economic growth than the Fiscal Compact’s European debt brake," said Aart De Geus, the newly appointed Chairman and CEO of the Bertelsmann Stiftung, when presenting the study. "This would ultimately benefit all of the countries concerned."
"According to our calculations, our reform approach would allow for real growth amounting to around €450 billion by 2030." These gains in growth could make a significant contribution to reducing the government debt ratio in many EU member states. As Mr De Geus pointed out, this would allow Greece, Portugal, Ireland and Spain to roll back their sovereign debt to 60 percent of GDP.
The new "Maastricht 2.0" sovereign debt framework proposed by the Bertelsmann Stiftung and Prognos would allow highly indebted EU countries – namely Greece, Portugal, Spain, Italy and Ireland – more room for manoeuvre over the medium to long term than would be the case with the European debt brake. However, applying the “Maastricht 2.0” rules in order to help these countries to roll back their sovereign debt to acceptable levels means that they would have to substantially cut government spending during the first few years.
Sweden has already demonstrated that this is a viable way forward. In 1993, in the wake of a severe economic crisis, Sweden’s government deficit amounted to more than 11 percent of GDP. By cutting government spending and raising taxes, Sweden was able to reduce this figure to only 1.5 percent by 1997 and to generate a budget surplus in the succeeding years. “Hence, rapid consolidation is a distinct possibility. But political leaders must be fully committed to achieving this goal,” Mr De Geus said.