An independent assessment of the EU’s fiscal framework: a presentation by the European Fiscal Board
This event will feature a presentation of the European Fiscal Board.
video & audio recording
The report evaluates the general functioning of the Stability and Growth Pact (SGP) as well as in the context of the 2016 surveillance cycle.
One of the main findings of the report shows the difficulty of a rule-based framework in a heterogenous union: while some member countries argue that the rules in place have been diluted in the past years, others perceive that the framework was applied too rigidly and hence, has hampered economic recovery. In this context, the presentation focused, among others, on the factors: simplicity, asymmetry, enforcement and stability.
Simplify fiscal framework
The complexity of rules and its measures (structural balance, medium term objective etc.) may be detrimental to the functioning of the SGP. For example, different targets in place allow some way of discretion depending on countries’ preferences.
Therefore, the framework should aim at an effective and simple rule that can be explained more easily to the broader audience where a debt rule may be preferred over a deficit rule. However, a member of the audience highlighted that the simple 3% deficit and 60% debt target did not lead to the envisaged outcome.
The rules in place are asymmetric with respect to the business cycle: in bad times, countries need to put disproportionally more fiscal effort. Furthermore, the rules are asymmetric depending on the fiscal position: countries not compliant with SGP receive recommendations, however, countries with fiscal space can act with discretion. This is increasingly important in a booming European economy with significant public debt overhang.
Formal sanctions have so far been a non-credible threat as they are usually politicized and counter-cyclical. Furthermore, it is also believed that markets do not always form reliable prices, understating risk in good times and overreacting in times of distress. A specific measure could be to allow the suspension of funding from the common budget – currently limited to European Fund for Strategic Investment.
Increase stabilization capacity
To better cope with symmetric and asymmetric shocks, additional to a deeper financial integration (banking union), some sort of fiscal capacity should be introduced e.g. an investment protection scheme to avoid cuts in long-term investment, rainy-day fund or fiscal budget; where an investment protections seem most feasible.
Furthermore, it has been discussed that the aggregated fiscal stance, the counterpart to EZB’s monetary policy, can be in conflict with national targets and interests (e.g. use of fiscal space).
In the specific 2016 surveillance cycle analysis for the Euro Area, the main findings encompass
- Narrow compliance gaps due to greater SGP flexibility and more generous targets
- Granted flexibility due to e.g. structural reforms were not followed up by ex-post assessment
- Commission applied discretion in the case of Spain and Portugal contrasting existing recommendations
- Actual aggregated fiscal stance was slightly below envisaged expansion because of unused fiscal space
Notes by David Pichler, Research Assistant, Bruegel
Check-in and lunch
Member, European Fiscal Board
Chairman, European Fiscal Board
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