A socially just and environmentally sustainable EU economic governance? – An experts’ paper

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 subordinate social and environmental objectives to the imperatives of fiscal discipline and economic competitiveness.

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.

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, an economy that, rather than treating economic growth as an end in and of itself, puts our human and planetary needs at the centre of its activities.

SOLIDAR therefore proposes six key policy recommendations:

1)   Introduce a golden rule exempting green and social investments from the calculation of national deficits. Notwithstanding the burden of properly classifying exempted green and social investments, the support 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 to pursue in the short term. In the longer term, this could be followed by an amendment to the Treaty through a more explicit definition of the investment clause.

2)   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. In this sense, the idea of creating a European Sovereignty Fund or strengthening the Just Transition Fund can be an important step forward.

3)   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, ensuring a better balance between economic, social and environmental objectives.

4)   Integrate the Social Convergence Framework, introduced by the Spanish and Belgian presidencies, aimed at promoting 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.

5)   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’, bridging 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.

6)   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 believes that the EU must adopt a more ambitious and transformative approach to economic governance. With an eye on debt sustainability, the EU must also make the required investments in the twin transition with significant social investment to support this transformation. It is therefore essential to design a new fiscal framework that not only addresses the shortcomings of the past but also aligns with the principles of progressiveness, social justice and environmental sustainability, building on existing frameworks such as the European Pillar of Social Rights and embracing new ones, such as those enshrined by the Well-Being Economy Framework.