The need to revise the eurozone fiscal rules now seems widely accepted and many amendments are being discussed.
They are still meant
to impose discipline on governments’ financial behaviour but are trying
to define smarter ways to constrain public deficits or spending.
The purpose of this policy insight is neither to dispute the need for
fiscal discipline nor to formulate a new proposal to enforce it. It is
rather to draw attention to an often-overlooked issue that has come to
the forefront during the last decade: when monetary policy has lost most
of its leverage on private demand, trying to meet a fiscal target that
does not take into account the spending behaviour of private agents can
unduly constrain economic activity.
The argument rests on a simple logic: if the private sector tends to
accumulate more financial assets than it issues liabilities, the
government has to provide the debt liabilities that will allow economic
activity to remain close to its potential. A look at the data shows that
when households set money aside, they mainly acquire – directly or
indirectly – debt claims while, contrary to what is often expected,
firms are hardly net issuers of debt liabilities. Public indebtedness
hence plays a key role in providing the counterpart to the financial
assets households tend to accumulate. In one way or another, our revised
fiscal rules should also take into account the reality of this
macroeconomic constraint.
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