Download publication

Policy Contribution

European fiscal rules require a major overhaul

In this Policy Contribution prepared for the French Conseil d’Analyse Économique, the authors assess current European fiscal rules and propose a major simplification. They recommend substituting the numerous rules with a new simple one, which would help reconcile fiscal prudence and macroeconomic stabilisation of the economy.

By: , and Date: October 24, 2018 Topic: European Macroeconomics & Governance

This Policy Contribution was prepared for the French Conseil d’Analyse Économique.

The reconsideration of the complex set of European fiscal rules should be a priority in terms of euro-area reform. The rules contributed to excessive fiscal austerity during the crisis, thus helping to aggravate and prolong its economic, social and political consequences. Moreover, either because countries did not abide by the rules or because the rules were not sufficiently strictly applied during good years, there was insufficient debt reduction in many countries in the 2000s, which reduced their fiscal capacity during bad years. In addition, the rules suffered from large measurement problems. They are based on a valid theoretical concept – the structural budget balance – but this is not observable and its estimation is subject to massive errors.

The post-2010 pro-cyclical fiscal tightening caused by the fiscal rules also led to the European Central Bank becoming overburdened as the main remaining stabilisation instrument. The fiscal framework has also put the European Commission in the difficult position of enforcing a highly complex, non-transparent and error-prone system, exposing the Commission to criticism from countries with both stronger and weaker fiscal fundamentals. The rules are used as a scapegoat by anti-European populists because they are seen as a manifestation of centralised micro-management which infringes on national sovereignty.

However, fiscal rules to ensure debt sustainability in the euro area are a necessity because the no-bail-out clause in case of fiscal crises is not credible in a monetary union. The fiscal rules need a major overhaul. They are not a silver bullet and cannot be substituted for the national democratic debate on fiscal choices and debt sustainability, but should help frame this debate. They should be as transparent and simple as possible, should set targets under the direct control of the government, should allow countercyclical fiscal policy and should incentivise the reduction of excessive public debt.

This Policy Contribution assesses the current framework and proposes a major simplification. We recommend substituting the numerous and complex rules with a simple new rule: nominal expenditures should not grow faster than long-term nominal income, and they should grow at a slower pace in countries with excessive debt levels. Our simulations suggest that this rule would help reconcile fiscal prudence and macroeconomic stabilisation of the economy. We set out a national and European institutional framework that could implement such a rule. We advocate the credible enforcement of fiscal rules, mixing several instruments pertaining to surveillance, positive incentives, market discipline and increased political cost of non-compliance.

Finally, one example of a country in which the national fiscal framework could be improved is France: we recommend the better integration of the French independent fiscal council (Haut-Conseil des finances publiques) into the national budget process by broadening its mandate to include endorsement of fiscal forecasts and debt sustainability analysis, by increasing its capacity to independently produce fiscal and macroeconomic forecasts.

Read article Download PDF
 

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Read article More on this topic More by this author
 

Opinion

The message in the ruling

The German Constitutional Court's ruling on the ECB's asset purchase programme is open to much criticism but it can hardly be blamed for raising an important question.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 12, 2020
Read article More on this topic More by this author
 

Blog Post

EU debt as insurance against catastrophic events in the euro area: the key questions and some answers

European Union debt can provide comprehensive insurance against the COVID-19 pandemic and can enable a macroeconomic response, even though EU debt is a liability for taxpayers in EU countries and therefore indirectly for national budgets. To establish it, countries will need to give up control over some spending and some revenues. To be politically sustainable, that control should not be intergovernmental but be grounded in EU institutions. The EU Treaty offers some possibilities, but treaty change might ultimately be necessary. Democratic legitimacy is at the core of the debate.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 22, 2020
Read article More on this topic
 

Opinion

The perils of more debt

Europe must find the “Ways and Means”.

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: April 10, 2020
Read article More on this topic More by this author
 

Blog Post

COVID-19: The self-employed are hardest hit and least supported

Self-employed workers are hardest-hit by COVID-19 lockdowns. Yet they often receive less government support than salaried employees. Is the disparity justified?

By: Julia Anderson Topic: European Macroeconomics & Governance Date: April 8, 2020
Read article More on this topic
 

Opinion

A European approach to fund the coronavirus cost is in the interest of all

We had not seen a common challenge as clear as this pandemic. The sum of national actions and programs is likely to be insufficient.

By: Agnès Bénassy-Quéré, Arnoud Boot, Elena Carletti, Jan Krahnen, Miguel Otero-Iglesias, Lucrezia Reichlin, Dirk Schoenmaker and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 6, 2020
Read article More on this topic More by this author
 

Opinion

A temporary, common fiscal stimulus to answer the mayhem of COVID-19

We are not in normal times and we have to surpass, albeit only for the duration of the COVID-19 shock, the hurdles that did not allow the euro-area to endow itself of a common fiscal policy.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: April 2, 2020
Read article More on this topic More by this author
 

Opinion

Will the economic strategy work?

Because even thriving companies can be killed in a matter of weeks by a recession of the magnitude now confronting the world, advanced-economy governments have reacted in a remarkably similar fashion to the COVID-19 crisis. But extending liquidity lifelines to private businesses and supporting idled workers assumes a short crisis.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: April 1, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: The macroeconomic policy response to the COVID-19 crisis

Which macroeconomic policy response is the best option to deal with the crisis currently unfolding and will ensure that the recovery will be as quick as possible?

Speakers: Grégory Claeys, Giuseppe Porcaro, Lucrezia Reichlin and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read article More on this topic More by this author
 

Blog Post

The fiscal consequences of the pandemic

The likely economic depression triggered by coronavirus will pose a serious fiscal challenge to some euro-area countries. Given the special circumstances of the pandemic, a European solution is needed, involving more European Central Bank purchases, a significantly increased European Stability Mechanism and some degree of mutualisation of the pandemic-related economic costs.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 30, 2020
Read article
 

Blog Post

COVID-19 Fiscal response: What are the options for the EU Council?

It is time for the EU Council to make quick progress on the fiscal front and announce something as soon as possible to show that it taken full measure of the severity of the situation.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 26, 2020
Read article More on this topic
 

Blog Post

Coronavirus and the politics of a common fiscal instrument

Coronavirus means many European Union countries will soon face major increases in their sovereign debt burdens, exacerbated by the sudden collapse of economic activity. What should the European Union do to address these debt problems?

By: Mark Hallerberg and Stavros Zenios Topic: European Macroeconomics & Governance Date: March 25, 2020
Load more posts