How should the Commission's fiscal framework proposal be improved?

The Commission’s April legislative proposal to replace the current fiscal rules of the EU is currently under debate in the Council and Parliament. The proposal is a compromise. On the one hand, it aims to make the fiscal framework more efficient and accepted among members states by basing fiscal targets on country-specific debt sustainability analysis (DSA). On the other hand, it includes simple numerical rules, or “safeguards”, to address concerns that the DSA-based adjustment might be insufficiently ambitious or vulnerable to political manipulation.

Does the compromise get the balance right? Does it effectively address the concerns about the DSA-based approach? Or has it overshot, undermining the objective of raising country ownership?

In a new Bruegel working paper, we try to answer these questions by replicating the Commission’s DSA and applying the proposed safeguards. While somewhat less demanding than the current system, the Commission’s framework would require ambitious fiscal adjustment: on average, about 2.5% of GDP over the medium term, in addition to the adjustment already predicted for 2023-24. For most countries with debt above 60% of GDP, the adjustment continues to be determined by the DSA rather than the safeguards.

But there are significant exceptions, particularly if the adjustment period was extended from four to seven years (as is possible under the framework for countries that submit growth-enhancing reform and investment plans). This would make adjustment unnecessarily tough for some countries. It would also undermine incentives to submit reform plans to justify an extension. Hence, the fear that the safeguards could interfere with the proposal's main aims is justified.

The co-legislators will need to address this problem. Critical safeguards must be fixed, particularly to prevent “backloading” of adjustment. The remaining safeguards should be eliminated or redesigned. Fears that the DSA can be manipulated should be addressed not by piling on safeguards but by reviewing the Commission’s DSA methodology, ensuring that it is transparent and available to all, and that member states agree with its underlying assumptions. The methodology should then be frozen until the next review.

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