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Out with the old, in with the new: adapting the EU’s fiscal rules for the challenges ahead

Last year, the European Commission set out its vision for the most comprehensive reform of the EU’s fiscal rules since the economic and financial crisis. These orientations followed a series of economic shocks that have demanded rapid, forceful and, in some cases, unprecedented policy responses. To give governments the necessary breathing space to respond to the seismic economic and social challenges presented by COVID-19 and Russia’s war of aggression against Ukraine, the EU temporarily relaxed its fiscal rules.

This approach worked. Due to the economic support measures at national and EU level, millions of people kept their jobs and business remained open.

Of course, this success should not blind us to some of the serious consequences of a prolonged period of fiscal support. Public debt has increased, in some cases to very high levels.

This now needs to be addressed. Sound public finances are a prerequisite for sustained economic growth.

By building buffers in good times, we can better respond to future crises.

Sound management of public finances is even more crucial given the economic and budgetary outlook for the decade ahead. We face a range of common challenges. The green and

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Despite facing a period of protracted slow growth since the second half of 2022, the EU labour market has shown a high degree of resilience. Following a temporary surge in the first months of the COVID-19 pandemic, unemployment in the EU quickly declined. Throughout 2022 and 2023, it has been as low as never before and the EU labour market reached unprecedented levels of tightness (see Figure 1), which seems to be associated more with growing labour demand than falling labour supply or mismatches (European Commission 2023a).

Figure 1 EU job vacancy rate and shortage of labour as a factor limiting production (%)

Notes: The job vacancy rate reports the proportion of total posts that are vacant. The time-series on factors limiting production refer to the percentage of surveyed firms reporting a shortage of labour as a factor limiting their production/business activity. In the case of construction, the reported scores are quarterly averages of the monthly survey results.
Data Sources: Eurostat, Directorate-General for Economic and Financial Affairs of the European Commission

The persistent labour shortages have induced firms to cling to their employees, in an attempt to ensure against costly recruitment of new staff once growth picks up (European Commission 2023a, Arce et