The European Union is considering more lenient economic recovery proposals that veer away from the grinding, top-down austerity rules that hit Greece and several other countries during the debt crises a decade ago and helped push millions into poverty, homelessness and unemployment.
The European Commission, the EU’s executive arm, said Wednesday that the new plans would give member states with serious debt issues far greater leeway in seeking a viable path to economic sustainability, combining a commitment to longer-term debt reduction while not excessively burdening a stretched population over too short a time.
After the 27-nation bloc had to spend its way out of a COVID-19 recession and as another downturn looms with Russia's war in Ukraine worsening inflation, the challenge is keeping investment high and debt levels manageable.
“Of course, times they are a changing,” said EU Economics Commissioner Paolo Gentiloni, addressing the differences between the current proposals and earlier commission decisions.
During the debt crisis, struggling nations from Greece to Portugal were barred from more conventional methods like massive borrowing to spend their way out of bad times and instead had to tighten their belts. That focus on bringing debt down with strict budget rules instead of boosting economic growth is now often seen as having exacerbated the crisis for many people.
Gentiloni went close to saying as much Wednesday. The reduction of debt “was not successful because the rules became more and more unrealistic. And when you have unrealistic path, at the end you have no path."
Later, reflecting on the devastating consequences of the crises that nearly brought the euro currency to its knees, he pulled back and said, “I don’t think we could blame these rules for the enormous crisis and difficulties.”
In hindsight, even EU officials have acknowledged there was an excess of austerity over a short period after the 2008 financial crisis, compounded by the sovereign debt crisis in a half-dozen EU nations a few years later.
The EU's response, coordinated by the commission, was to impose stringent austerity on nations that had led debt spiral out of control as several nations teetered on the brink of bankruptcy.
Even though most of the EU nations used the same euro currency, economic and financial policy was still decided in national capitals. Germany lived by any rule that would keep debt as low as possible, while much-poorer nations like Greece saw public spending as a way to wealth.
Investors stopped lending Greece money in 2010 after Athens acknowledged misreporting key budget data. To keep the country afloat, its European partners and the International Monetary Fund approved three rescue loan programs lasting from 2010 through 2018 worth a total 290 billion euros ($293 billion).
In exchange, international creditors exacted what many Greeks still see as a pound of flesh: deep state spending and salary cuts, tax hikes, privatizations and other sweeping reforms aimed at righting public finances.
The economy contracted by more than a quarter and skilled professionals emigrated in droves. Poverty and unemployment skyrocketed, and at one point over a quarter of the workforce was jobless.
That fallout shows why the EU proposals are now centering on giving nations a better sense of self-determination and making sure that investments should be maintained rather than stifled.
“With the wisdom that you can have after the crisis, we can say that we were not able to keep the level of investments as they should have been in the 10 years after the economic and financial crisis,” Gentiloni said. “And this is something that we have to change.”
German reaction was swift — and predictable. Finance Minister Christian Lindner said that “it is clear that any reform of the European fiscal rules must correspond to the core principle of ensuring financial stability.”
“We need on one hand a growth-friendly policy, but on the other hand, debt ratios in the European Union must be resolutely reduced,” Lindner told reporters in Berlin.
