In recent opinions, French and German economic advisers suggest replacing the current deficit and debt limits enshrined in the TFEU by a limit to nominal public expenditure. 

The limit would solve long-standing structural disequilibria in the Union:  preventing high public debt in some Member-States thus precluding the need for debt mutualisation. By indexing the spending limit to potential growth, the EU would ensure the Euro’s stability. The limit would be consider with the currently instated long-term limit to public debt and medium-term limit to the structural deficit.

The expenditure limit would also consider adjustments and a path towards correction of excessive debt as defined on the Stability and Growth Pact. 

The rule would prevent Member-States from investing and spending past their computed growth capacity, enforcing efficiency in government spending. It would also limit growth potential to those Member-States public capital is significantly inferior than incumbents.

Considering only nine of the 28 Member-States, and only three of the 11 Cohesion Member-States, are forecast to respect the structural deficit limit, this consequence is of relevance. 

The 3% deficit limit ensures Member-States employing more labour-intensive structures, thus with lower umemployment benefit costs, may increase capital expenditure to catch-up and improve both public and private capital. As these Member-States’ economies growth rates converge with the EU’s cycle, the nominal limit to expenditure would restrain these Member-States’ catch-up process.

For instance, the IMF concludes “changes in public capital stock can explain growth differences across countries, even though the evidence on the impact of public investment is mixed.” Creel finds evidence both public investment and investment are relevant for growth in Europe and Marvão Pereira finds significant evidence of the impact on growth of not only capital levels but also of spillovers on other European regions. 

The IMF’s Investment and Capital Stock Dataset (factsheet) shows Romania’s capital stock is 74% of Netherlands, whereas the Czech Republic’s is at 76% of Belgium’s – both pairs with similar populations within. 

Just so we may assess the impact, Portugal’s is 89% of Belgium’s after 32 years of Membership. 

Notice the German Council of Economic Advisers explicitly refuses the role debt adjustment would have in increasing the nominal expenditure of catch-up Member-States with lower public debts.


2 thoughts on “French and German Experts’ could hamper EU-13 catch-up 

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