Lars Feld, Wolf Heinrich Reuter, 31 March 2022

Debt ratios of EMU member states, which were already high in some cases, have increased significantly during the pandemic. This column argues that the current review of the European fiscal framework should not only discuss the design of the framework, but also how to strengthen enforcement and increase compliance with the fiscal rules. Increasing the political costs of non-compliance – through a reduction of complexity of the framework, an increase in national ownership and transparency, as well as simplicity of assessment – could help achieve this. Adding more flexibility, exceptions, and discretionary judgement would be counterproductive.

Xavier Debrun, Wolf Heinrich Reuter, 24 January 2022

The European fiscal governance framework has grown into an arcane machinery. Yet, experts’ convergence on the need for a more effective and simpler system falls on political deaf ears. Greater reliance on national fiscal frameworks could significantly strengthen European fiscal governance while passing political hurdles. The authors of this column see value in further strengthening national ownership of fiscal responsibility while keeping central safeguards against risky fiscal behaviour.

Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni, Charles-Henri Weymuller, 14 January 2022

Over the last few years, there has been a growing consensus that the current rules of the Stability and Growth Pact are outdated, too complicated, and not countercyclical enough. The authors of this column present a proposal to strengthen the European fiscal framework based on two elements: a revision of the fiscal rules, and a plan to create a European Debt Agency to absorb the debt accumulated during the pandemic. This first of two parts focuses on the fiscal rules and proposes setting a ceiling on the growth rate of primary spending, to be revised over three-year intervals, targeting debt reduction over a ten-year horizon.

Miguel Poiares Maduro, Philippe Martin, Jean-Claude Piris, Jean Pisani-Ferry, Lucrezia Reichlin, Armin Steinbach, Beatrice Weder di Mauro, 16 December 2021

The stability and adequacy of the European monetary and fiscal frameworks are increasingly challenged by enduring changes in the economic environment. This column summarises the findings of a group of economists and lawyers specialised in EU matters who undertook a comprehensive assessment of the economic requirements and legal conditions of a well-functioning macroeconomic policy system for the EU and the euro area. They propose reforms of economic framework in line with economic necessities along three dimensions (coordination of fiscal and monetary policies, fiscal rules, and fiscal capacity at EU level) and assess their legal feasibility. They conclude that meaningful reforms that would bring legal clarity and improve economic performance are feasible within the confines of existing primary law.

Ethan Ilzetzki, 11 November 2021

The October 2021 Centre for Macroeconomics survey asked the members of its UK panel to evaluate the performance of UK fiscal rules to date and which rules would best serve the British economy going forward. This column reveals that the majority of the panel thinks the sequence of fiscal rules in place in the UK since 1997 have caused a material reduction in UK public debt. However, twice as many panellists thought these rules harmed the conduct of macroeconomic policy than those that thought they helped. Going forward, a majority of the panel believes that well-designed rules limiting public deficits or debts would best improve the conduct of macroeconomic policy, but nearly a third would scrap fiscal rules altogether.  

Erik Nielsen, 29 October 2021

European policymakers are considering whether to reinstate the existing fiscal rules with only the most necessary adjustments, or to put in place a better framework. This column proposes reform anchored in the most important economic criteria for public sector debt sustainability. First, ‘standards’ for a healthy budget composition that should include an agreed minimum ratio of investment relative to GDP and the principle that countries with public debt in excess of a certain level of GDP will reduce that ratio during ‘good years’. Second, a higher-frequency ‘rule’ to flag potential trends which might compromise future public debt sustainability, in the form of a cap on projected interest payments as a share of fiscal revenue.

Ethan Ilzetzki, 10 June 2021

Fiscal rules were enshrined in the founding documents of the European Monetary Union. This column presents the latest CfM-CEPR survey, in which the panel of experts on the European economy were nearly unanimous in agreeing that the existing EU fiscal rules require revision. Most panel members would opt for some combination of fiscal councils; more flexible, countercyclical, or expenditure-based rules; and increased fiscal capacity at the EU level. A smaller share of panelists would scrap fiscal rules altogether, leave fiscal policy to national authorities, and provide greater clarity that the EU would not bail out countries facing debt problems. A single panel member called for stricter rules with greater enforcement.

Gianmarco Daniele, Tommaso Giommoni, 10 May 2021

Austerity measures have been widely adopted around the world with mixed results in terms of public debt reduction and adverse political effects. This column examines the effect of fiscal austerity policies on corruption in Italian municipalities. The budget rules have led to a decrease in both recorded corruption rates and corruption charges per euro spent, without a clear effect on local public service provision. The drop in corruption emerges mostly in pre-electoral years for mayors eligible for reelection. Budget constraints might induce local governments to curb expenditures while dampening exposure to corruption.

Olivier Blanchard, Álvaro Leandro, Jeromin Zettelmeyer, 22 April 2021

The EU’s fiscal rules are currently suspended. If reinstated, they will need to be modified to account for the higher levels of debt. This column, part of the Vox debate on euro area reform, argues that simple fiscal rules provide a crude and unsatisfactory assessment of debt sustainability and proposes that they be replaced with fiscal standards. In particular, it calls for qualitative prescriptions that leave room for judgement together with a process to decide whether the standards are met. This proposal envisages a larger surveillance role for independent fiscal councils and/or the European Commission, as well as a judicial body for adjudication over disputes. 

Martin Larch, Stefano Santacroce, 24 September 2020

The urgent need to respond to the unprecedented economic shock resulting from the Covid-19 pandemic has relegated the review of EU fiscal rules to the background. However, the question of whether and how to review the Stability and Growth Pact will soon re-emerge as a key topic in the policy debate, not least in light of the very sharp increase in government debt levels. This column presents a new database from the Secretariat of the European Fiscal Board that tracks numerical compliance with the SGP. It offers valuable insights into which rules worked or not for which group of countries and under what circumstances. The database is available to the research community and can inform any future attempt to improve the current fiscal framework of the EU.

Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge, 11 April 2019

Emerging market and developing economies have achieved a remarkable decline in inflation since the early 1970s, supported by robust monetary policy frameworks, strengthening of global trade, financial integration, and the disruptions caused by the global crisis. The column argues that a continuation of low and stable inflation in these countries is not guaranteed. If this wave of structural and policy-related factors loses momentum, elevated inflation could re-emerge. Policymakers may find that maintaining low inflation is as difficult as achieving it.

Pierre Beynet, 11 October 2018

European fiscal rules have become overly complex over time. Some consider them too lax to ensure fiscal sustainability, while others see them as too rigid to ensure adequate smoothing of economic activity in bad times. This column, part of the Vox debate on euro area reform, argues that to make the rules more effective, they should be simplified and focus on expenditure growth, while avoiding reliance on unobservable concepts such as structural fiscal balances. Increased ownership requires more flexibility and built-in positive incentives, such as allowing deviations when financed with GDP-linked bonds, which would also improve fiscal sustainability.

Peter Bofinger, 13 September 2018

Two proposals for reforming the euro area’s fiscal framework were published on Vox yesterday. This column describes how, in essence, the proposal from the French economists is based on discretionary policy decisions while their German counterparts propose a largely rules-based approach. It also argues that with its assumption that the medium-term goals of fiscal policy cannot be determined by simple formulas, the French proposal is closer to the status quo than the German concept and has a greater likelihood of resulting in good fiscal policy.

Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 12 September 2018

Simplicity and transparency are essential to strengthen the effectiveness of fiscal rules and to ensure sustainable public finances; thus the German Council of Economic Experts has criticised recent reforms of the European fiscal framework for exacerbating their complexity. This column proposes a redesign of the existing fiscal framework together with a drastic reduction in exception and escape clauses. The reformed framework employs a modified expenditure benchmark as an annual operational target. In addition, it implements the structural deficit rule as its medium-term target through a multi-purpose adjustment account, and a pre-specified debt ratio as its long-term limit achieved with a debt-correction factor.

Thomas Wieser, 21 May 2018

The proposals on fiscal frameworks and rules in the recent CEPR Policy Insight on euro area reform showcase the multiple dimensions of the fundamental dilemmas we are confronted with in the governance of the euro area. This column, part of the VoxEU debate on Euro Area Reform, looks at the challenges to the central role of the Commission that have arisen as the rules-based fiscal framework has been severely compromised.

Roel Beetsma, Martin Larch, 10 May 2018

The key question in the policy debate on the next steps for the Economic and Monetary Union seems to be whether we can progress with integration in a context where some countries perceive themselves as consistently paying for policy mistakes of others, while others see themselves victims of a moral diktat. This column, adding to VoxEU's Euro Area Reform debate, argues that the policy dilemma around a central fiscal capacity can only be overcome if fiscal risk sharing and risk reduction advance in parallel. Therefore, reform of EU fiscal rules need to receive more attention. 

John Muellbauer, 10 June 2016

The Eurozone faces a lost decade or worse under current fiscal policy and restrictions on monetary policy. The ECB now faces a fundamental contradiction in its mandate between the Lisbon Treaty’s Article 127 (price stability, plus the ECB target of under but close to 2% inflation) and Article 123 (no overt monetary finance of governments). This article discusses three options – two ways in which the fiscal rules could be improved; and the temporary abeyance of Article 123, making it ‘state-dependent’. It also explains why recent arguments against the effectiveness of ‘helicopter money’ are mistaken.

Paolo Manasse, 01 December 2014

Today’s Eurozone fiscal discipline is the amalgamation of reforms implemented over ten years, with the latest and largest changes agreed in crisis settings. This column argues that the result fosters neither growth nor stability since actual fiscal policy has been powerfully procyclical. The focus on intermediate targets has distracted attention from the final objectives – debt sustainability and economic convergence. A drastic simplification of the current rules is proposed.

Francisco de Castro, Javier Pérez, Marta Rodríguez, 12 November 2011

The recent huge revisions witnessed in Greek data have raised concerns also about the credibility of the EU’s fiscal data reporting system. This column argues that initially published fiscal-deficit figures tend to be to revised towards an increased deficit at subsequent publication dates, and that the proximity of elections and the business cycle explain data revisions. It says that the EU should strengthen the role of Eurostat, the EU’s statistical agency, in auditing individual countries’ fiscal accounts and encourage EU countries to adopt more stringent fiscal rules.

Edoardo Campanella, 20 February 2011

At the February 2011 European Council meeting, Angela Merkel and Nicolas Sarkozy called on their Eurozone counterparts to sign up to a new pact for closer economic coordination. This column argues that introducing constitutional fiscal rules across Europe would be an important step towards fiscal sustainability, but that their rigidity should be offset by a more flexible economic design.

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