Carlo Clericetti – How do we change European Union rules?

The EU has opened a public consultation on reform, in which everyone can participate. The wording of the questions does not indicate a change of mentality: yet the last two crises have shown that this is exactly what is needed. Here are some proposals for how we can learn from the lessons of the past.

Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he  blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.

Translated and edited by BRAVE NEW EUROPE

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The European Union has opened a public consultation on the reform of the rules it has laid down since Maastricht. With the pandemic these rules were suspended and will remain so in 2022, but in 2023 there are plans to reactivate them. Not exactly the same: although there are still those who would like to restore them as they are – and this says a lot about the ability to understand the economic dynamics of a part of the so-called “ruling class” – the majority has finally understood that those rules have worked badly, to put it mildly. If we want to put it more clearly, some of them are demented and the economists who invented them – and perhaps still support them – should at least admit publicly that they were wrong, as some have done.

Anyone can participate in the consultation, until the end of the year, by going here. A great initiative of theoretical democracy. To consider it effective, we would need to know who will read these proposals (if anyone reads them at all) and whether the same attention will be given to those who, among the qualifications to be chosen from, define themselves as “European citizen” or instead as “central banker”.

There are 11 points to be answered, each of which ends with a question. But most of them could simply be merged into the first point, whose final question expresses the spirit in which this reform is being approached and defines the horizon within which the questionnaire’s preparers, who evidently do not even conceive of thinking otherwise, are moving. The question is: “How can the framework be improved to ensure sustainable public finances in all Member States and to help eliminate existing macroeconomic imbalances and avoid the emergence of new ones”?

It is no coincidence that the first thing they talk about is ‘sustainable public finances’. This has always been the obsession of those who built the baroque and dysfunctional system of the Union, and who have always traded ends for means, or rather: they have taken a means (the proper functioning of the economy) as the end, instead of what should instead be pursued, namely a situation that ensures a decent standard of living for all citizens, and on the basis of that objective to study how to make the economy work better.

What is needed is a change in logic, a change in priorities and a change in methods.

A change in logic and priorities

Rules must serve the common good, not the other way around. In the European treaties, employment is mentioned almost reluctantly and is not a priority objective. Instead, it should become one, and an objective should be set that is just as important as the one given until now to controlling public finance variables. The target should be an unemployment rate of no more than 3% and a participation rate of no less than 80%, levels that are capable of unlocking the full potential of economies. To “improve the picture”, it is also necessary to mobilise unused resources.

The pursuit of competition is right, but it should not be pursued at the expense of working conditions and pay. A minimum standard for working conditions has to be established: if not all member countries are able to apply it immediately, a path of progressive and continuous approximation to this standard, identified for each country according to its starting conditions, has to be identified.

So far, the sustainability of public finances and the reduction of debt in relation to GDP have been pursued by focusing essentially on controlling expenditure and deficit levels. This criterion has not only failed to reduce debt, but has also put a brake on growth. The criterion must be replaced: the debt is reduced when nominal GDP growth is higher than the cost of servicing the debt, and this is therefore the variable that must be observed for economic policy decisions. The emergency caused by the pandemic has suddenly overcome the opposition to using budgetary policy to deal with adverse economic situations: and, contrary to previous rules, it has been successful. Now is the time to take note and use that parameter to shape economic policies.

A change of methods

Unobservable parameters, such as potential GDP and the resulting output gap, have provided pro-cyclical and often paradoxical indications. The solution envisaged, i.e. calculating potential GDP as the average of the five years preceding the observation and estimates for the following five years, would not yield better results. In cases of dramatic recessions, such as 2008 and the one caused by Covid, the average of the previous five years certainly underestimates the actual potential; and exercises that propose to estimate the trend of the next five years are more for astrologers than for economists. In the last 10 years, estimates projecting a single quarter have been regularly wrong, and not by a small margin. The concept of potential GDP can certainly be used for econometric exercises, but it is useless and damaging if one claims to use it as a guide for economic policies.

Even worse, if possible, is the use of the Nairu (Non-Accelerating Inflation Rate of Unemployment), according to which a certain level of unemployment must remain in order not to lose control over inflation: shameful from an ethical point of view, senseless from the point of view of the calculation method, totally unreliable from the point of view of the results. Its scientific unreliability has been declared by a large number of international economists, and even Federal Reserve Chairman Jerome Powell agreed that it had failed too many times to still be considered useful.

Some proposals

Employment: The union aims to reduce the unemployment rate to 3% and raise the participation rate to 80%. It is also appropriate to introduce the objective of employment into the statute of the ECB on an equal footing with that of controlling inflation. As mentioned above with regard to working conditions, paths should be identified that are tailored to the situation in each nation.

Public finance: As a rule, countries are obliged to have a balanced budget for current expenditure. The allocation of other expenditures to investment will be monitored by the parliamentary budget offices of the various countries and validated by a special structure set up at the European Commission. The benchmark to be used to check sustainability becomes the nominal GDP growth rate compared to the cost of debt service. When the former is lower than the latter, public spending can increase by a percentage corresponding to the gap detected. In order for the anti-crisis measures to be effective, they should be checked every six months. We are talking here about anticyclical measures, which can be a mix of current expenditure and fast-acting investments, from tax bonuses to support economic sectors in difficulty to maintenance works and expenditure such as replacing the bus fleet with electric busses. This is different from investments in major works or strategic transformations (such as energy and technology transitions) which should be guided by long-term planning.

Jobs: The Union defines minimum standards for working conditions. If not all member countries are able to apply them immediately, a path of progressive and continuous approximation to these standards must be worked out, identified for each country according to its starting conditions. The European and national competition authorities ensure that competition does not take place to the detriment of working conditions (race to the bottom), both within and between countries, or in violation of environmental protection provisions.

Macroeconomic surveillance: Among the variables under observation in the Macroeconomic Imbalance Procedure (MIP), the one of particular relevance for the stability of the area is the balance of payments. The current rules provide for asymmetric limits for the deficit (4%) and the surplus (6%), a difference that has no reason to exist. Moreover, compliance with these limits should be made more enforceable, with the obligation for countries with excessive deficits to rapidly take appropriate measures to reduce them; but excessive surpluses are just as damaging to the stability of the area, because they curb its growth and have deflationary effects, and, if persistent, should be subject to a sanction of at least 10% of the value of the excess. In addition, the level of private sector debt should be monitored more closely, as experience shows that the state is forced to come to the rescue in cases of severe crisis.

Taxation: A minimum tax rate is set for both companies and individuals. Member States are prohibited from derogating from this rate, even by means of specific agreements. In the event of non-compliance, a penalty is imposed equal to the difference between the minimum rate and the amount actually collected. The basic rate for businesses should not be less than 25%, and the unification of the criteria for defining the tax base is also indispensable.

Investments: If the conditions exist for raising money on the markets at a cost equal to or less than 1% real on the ten-year maturity, the Union is obliged to issue common debt, not less than 1% of European GDP, to be redistributed to the Member States in accordance with their share of the Community budget. These sums are to be allocated 0.8% for investments in extraordinary maintenance, technology, health, education, social housing and 0.2% for development cooperation.

The devil is in the detail

Definitions. Any proclamation of principle can in fact be circumvented if there is no real political will to pursue it. The most classic example are the definitions of employment and unemployment. An employed person is one who has done at least one hour of paid work in the week preceding the survey, while an unemployed person is one who has done a certain amount of work in the search for a job. These are internationally agreed definitions, so they cannot be changed at will: but there is nothing to prevent us from also collecting data that frames the problem in a more substantial way. For example, by introducing a definition of ‘underemployed’ for anyone who cannot maintain continuous employment, or who works involuntarily part-time, or who is unable to earn a salary identified as a minimum subsistence level. As for unemployment, the OECD, for example, classifies it with six different definitions, which progressively include more situations.

This is just one example, and the problem can be extended to all the points mentioned. In the classification of investments, or in endless tax issues, such as the crucial one of defining the tax base. In short, it is not enough to declare an objective. Every word used to define it can make a difference in weakening it or making it merely formal.


The proposals listed here, if accepted, would give a different direction to European economic policy, which is much needed given that over the last twenty years the Eurozone has been the economic area – among the most important ones – with the lowest growth rate. All are important, but some even more so:

setting an employment target by abandoning disqualified concepts such as Nairu and Nawru

abandoning unobservable parameters

adopting the ratio of nominal growth to the cost of debt as a benchmark for budgetary policy; a balanced current account

European minimum rate of taxation

The need for change has become apparent even to those who until before the pandemic crisis stubbornly supported the old policies. If they are only minor adjustments, an important opportunity to put right the mistakes of the past will have been missed.

Carlo Clericetti

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