Commission proposals to take greater account of a country’s overall level of debt and other specific economic circumstances when examining budget deficits are welcome. Similarly, European trade unions have insisted on the need to focus also on fiscal policy in the upturn, not just the downturn. By improving the economic rationale of the Pact, political enforcement will be made easier. The Commission’s call for more peer pressure, rather than legal sanctions, raises a number of questions that will need to be addressed in the coming months.

While certainly a step in the right direction, the Commission proposals are a long way from fully reflecting the role fiscal policy should play in the context of EMU. There is no mention of the ’quality’ of spending, for example. Yet Europe needs to invest more in its human and physical capital: government spending in these areas should be treated differently from consumption-oriented spending. More fundamentally the Commission proposals do not take into account the fact that, in a monetary union, fiscal policy needs to play an key role in adjustment between countries that no longer have the possibility of currency realignment. The fiscal deficit is not simply set by government policy. Quite apart from economic shocks, to a large extent deficits reflect what the private sector wants to save and invest. High-savings countries are both able and need to run larger budget deficits. This must be an important consideration in assessing a country’s specific economic situation.

The ETUC will contribute to the public debate on the reform of the Social and Growth Pact (SGP) with detailed proposals in due course.