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Fiscal showdown in uncertain economic circumstances – EURACTIV.com

The economic policy agenda for the coming year is packed with negotiations about EU fiscal rules, tax policies, minimum wages, and financial regulations.

At the same time, the EU’s trade policy will have to accommodate its traditional openness with calls for more assertiveness on the one side and more sustainable and socially responsible practices on the other.

This lookahead for 2022 should be read with a cautious reminder in the back of one’s mind that the ongoing pandemic and the related economic fallout and inflation might quickly change policy priorities in the EU.

Fiscal Rules

In October 2020, the European Commission launched a review of the EU’s economic governance framework. The most controversial parts of the framework are the fiscal rules, governing, among other things, how much public debt member states can hold and how high the yearly budget deficit may be.

The rules will not be enforced until the end of 2022 due to a general escape clause activated at the start of the pandemic, but they are expected to come back into force in 2023. As the budget for 2023 is prepared in 2022, the Commission is expected to deliver its first guidance in the first quarter of 2022.

EU leaders should agree on a reform of the fiscal rules until the summer of 2022. Both the Italian and the French governments are intent on reforming the rules to allow more growth-enhancing investments, saying that growth is the only way to lower the debt burden.

The German government used to be a strong proponent of austere rules but the new coalition government’s position is unclear. While the new German finance minister, liberal leader Christian Lindner, used to be critical of Southern European fiscal policies, he started his mandate on a much more conciliatory note.

Similarly, the new Dutch government, formerly a strong proponent of frugality, seems slightly more willing to spend public money, at least domestically.

Even with these hints at a more conciliatory environment for fiscal policy, a reform will be hard to agree on. In the absence of an agreement on the reform of fiscal rules, a temporary solution will have to be found for the national budgets in 2023.

At the same time, 2022 will see significant payouts to member states from the recovery fund. How these funds will be used and which member states will be profiting the most from the grants might influence the mutual trust of EU governments in the negotiation on fiscal rules.

Taxes

2021 was the year of the landmark OECD tax deal to counter corporate tax competition but also of the Pandora Papers exposing global tax malpractice. 2022 will show whether the world can deliver on the agreement.

In December 2021, the Commission announced its plans to implement the minimum corporate tax by means of a directive and expressed its hopes that it could already be agreed upon within the first half of 2022 by member state governments and the European Parliament.

This might turn out to be tricky, however, as Estonia, Hungary, and Ireland only hesitatingly agreed to the tax deal in the first place and the directive needs unanimity of all member state governments for it to pass.

At the same time, political troubles for US President Joe Biden shed doubt on the implementation of the other part of the OECD tax deal, namely the reallocation of taxing rights of big, highly profitable firms from the jurisdiction where they are headquartered to the jurisdiction in which they earn their revenues.

It is unclear whether all EU countries still want to implement the tax deal if the US is not sure to do so itself. A proposal for a European implementation of the reallocation of taxing rights based on the activity of the companies is expected to be presented in July 2022.

Moreover, as a reaction to scandals like the Pandora Papers, the Commission recently announced that a proposal to reign in tax havens outside the EU was forthcoming in 2022. It might target shell companies used to hide assets in non-EU jurisdictions in a similar way that the newly proposed directive against shell companies does for EU jurisdictions.

Minimum Wages

Getting an agreement on a minimum wage directive is one of the main goals of the French presidency of the EU Council in the first half of 2022.

The directive, proposed by the Commission in 2020, aims to ensure that statutory minimum wages are adequately high, meaning at least 60% of the median wage in the respective member state. However, the directive does not force member states to introduce a statutory minimum wage if they do not already have one.

Moreover, the directive aims to increase the coverage of collective bargaining.

Towards the end of 2021, the EU Parliament and the EU Council each agreed on a negotiating position. In the first months of 2022, the French presidency wants to find a compromise between the two co-legislators.

Resistance is to be expected from Denmark and Sweden, two member states that want to keep their labour markets free from EU influence.

Towards a more responsible and more assertive trade policy?

In mid-February 2022, the Commission plans to announce a proposal to make sustainable corporate governance mandatory for EU companies. The proposal should force companies to ensure that human rights and environmental standards are respected in their supply chains.

However, the proposal had initially been announced for summer 2021, after which it had been postponed, first to October, then to December 2021. The newly announced date of February 2022 should thus not be seen as a fixed deadline for the Commission’s proposal.

At the same time, the EU is looking for a response to third countries that try to use economic interdependence to coerce European countries into their bidding. The most recent example is the pressure the Chinese government is putting on Lithuania for its support of Taiwanese independence.

In December 2021, the Commission proposed a new instrument that would give the EU executive the right to swiftly take countermeasures against coercive actions by third countries.

2022 will see a lively discussion on this topic among member states who fear the instrument might lead to protectionism and those who see the instrument as an important step towards a geopolitically more credible EU.

Financial Regulations

In 2022, there will be a variety of legislative negotiations on regulatory proposals the Commission presented in late 2021, for example, the updated capital requirements for insurance companies (Solvency II) and banks (Basel III).

Additionally, the Commission is expected to present proposals to strengthen capital markets in Europe. A directive for a debt-equity bias reduction allowance (DEBRA) should be presented in April, with the purpose of facilitating the access of EU companies to equity finance.

[Edited by Zoran Radosavljevic]



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