01 March 2012

Stijn Verhelst: Will the national ‘golden rule’ eclipse the EU fiscal norms?

This column compares the golden rule to existing EU fiscal policies. It argues that the successful implementation of the golden rule would overturn much of the existing economic governance in the eurozone to become the main determinant of fiscal discipline.

The intergovernmental Treaty defines the golden rule as a structural deficit of 0.5 per cent of GDP or less. It applies to all eurozone countries whose debts are not significantly below 60 per cent of GDP. The structural deficit tries to filter out temporary fiscal measures and fiscal evolutions that are purely due to cyclical changes in the economy. It therefore refers to over-the-cycle deficits. Yet putting this concept into practice could prove difficult.

It is useful to indicate that the new golden rule does not correspond with the academic meaning of a golden fiscal rule, i.e. deficits can only be used to finance investments that are to the benefit of future generations.

A major nuance to the golden rule is that it can temporarily be disregarded due to economic downturns that go beyond normal cyclical evolutions, or other major unforeseen events. These exceptions, along with the conceptual difficulties, could allow eurozone countries to dilute the golden rule. However, the golden rule’s firm anchoring in national legislation and the German resolve to impose eurozone-wide fiscal discipline are likely to counterbalance those loopholes. While the golden rule’s success is far from evident, it thus seems overly presumptive to already write it off as irrelevant.

Conclusion

A successful introduction of national golden rules would overturn the eurozone’s fiscal setting. As Verhelst argues, the golden rule will easily surpass the fiscal discipline required by the EU-level norms in the vast majority of situations. Consequently, the golden rule will effectively determine the future fiscal discipline to which eurozone countries have to adhere.

The role of EU-level fiscal norms will decrease considerably. They will serve to counter the inadequacy of a specific golden rule. In the likely event that a golden rule proves impracticable or is diluted by a eurozone country, EU fiscal norms can step in to restrict the country’s deficits. In the eurozone, EU fiscal norms will therefore evolve from their current normative function into a safety net – only to apply when a golden rule proves defective.

The stringency of the golden rule compared to EU fiscal norms raises questions about the soundness of its design. The golden rule risks obstructing public investments that address long-term challenges such as ageing and the shift towards a green economy. It seems therefore preferable that the implementation of the golden rule considers public investments. If not, eurozone countries will, perhaps sensibly, be inclined to circumvent their golden rule.

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