Written by 9:05 pm European Union

EU must solve its fiscal discipline problem

The European Union is preparing for one of the most challenging periods in its history. Due to the tension with Russia, the possibility of an energy crisis heightens as we get closer to winter as well as the likelihood of historic energy prices. This means production costs will be very difficult to manage for many small and medium-sized enterprises (SMEs). Every single day, we see the news that a well-known company from one of Europe’s leading countries has suspended production for a while due to excessively high energy costs.

The focus of the last video conference meeting between German Chancellor Olaf Scholz and French President Emmanuel Macron was once again energy prices. While the two leaders reviewed all possible measures that can be implemented across Europe, it is understood that they evaluated how the two countries can show solidarity in the energy sector.

In the Corriere Della Sera newspaper, French Economy Minister Bruno Le Maire highlighted the need to concentrate on an “energy market reform” that will separate the record-high natural gas and electricity prices, stressing that EU member states can surpass this only by acting together and showing solidarity. Maire said that although it is the main task of the European Central Bank (ECB) to fight inflation, it is a must that governments adopt all kinds of measures to protect EU citizens from rising energy and food prices, especially for low-income groups.

However, the most important challenge to EU states in this situation is the increasing problems related to fiscal discipline. The budget deficit and public debts of many EU countries show that they will need to exercise fiscal discipline in order to manage their public finance policies, which they must implement to rightfully support their citizens and SMEs, in a very challenging situation. In the latest report titled “Reform of the EU Financial Framework,” the International Monetary Fund (IMF) pointed out some significant facts. According to the report, although the public finance rules determined by the Maastricht Criteria provide a fiscal road map for EU states to some extent, there is a budget deficit and public debt problem that deepens economic fragility in EU countries. This threatens the future of monetary union.

Although the IMF emphasizes that the EU financial framework needs reform, it does not hesitate to criticize the low real interest policy throughout the EU, which is an extension of the neoliberal orthodox understanding that has reemerged in the international institution. Therefore, it supports economic activity and the real sector; and invites the ECB to more briskly raise the monetary policy interest rate.

However, this will also mean a serious increase in financing costs for European SMEs, who are already having a hard time with their production costs. The IMF also recommends that EU countries with high public debt correct their budget balances over the next three to five years in order to reduce this pressure. Türkiye’s message that financial discipline will never be compromised in the last medium-term reform reminds us once again that we have such an important field of action to support the real sector and consumers. The fact that the EU will have to get through this autumn and winter while experiencing financial difficulties will also require a serious struggle.

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