04 February 2014

German Council of Economic Experts: Working paper on Fiscal Compact

The German Council of Economic Experts released an updated version of the working paper, "Implementation of the Fiscal Compact in the euro area Member States", pointing out potential loopholes in the budget rules and in the correction mechanisms in particular.

The unfortunate experiences during the European sovereign debt crisis have led to the adoption of the European Fiscal Compact in December 2011. Its primary objective is the prevention of future debt-related crises by imposing on the signatory states the duty to implement budget rules into national legislation. While the Fiscal Compact defines some cornerstones of the budget rule, the precise legal wording is left to the states. It is obvious that such an approach leads to heterogeneity across countries in rules eventually implemented.

Besides the design of the fiscal rules, the progress of implementation also varies across the countries. While the budget rule is already effective in some states, a draft law is still pending approval in others. Hence, it seems necessary to gain a broad overview of the current state of implementation. The objective of this survey is twofold. On the one hand, the expertise presents the status quo of the implementation of the Fiscal Compact on the national and sub-national level in the Euro area Member States. On the other hand, the expertise points out potential loopholes in the budget rules and in the correction mechanisms in particular.

In addition, the survey focuses on the legal design and staffing of the independent fiscal councils, which are supposed to supervise compliance with the new fiscal rules. Although the fiscal councils are generally not vested with the power to intervene into national fiscal policies directly, they might have considerable impact on fiscal outcomes through their influence on the public debate. Thus, staffing the councils with independent, internationally renowned economists may be seen as a signal for fiscal credibility and sustainability. A further focus is put on the fiscal framework of federal states. Our survey will in particular examine whether the tragedy of fiscal commons is mitigated by a credible no-bailout rule, or by other rules and institutions.

In section II we provide a brief analysis of the fiscal situation in the Euro area Member States. Section III comprises a concise description of the requirements of the Fiscal Compact and points out regulatory loopholes. In section IV an (mainly tabular) overview of the current state of implementation is presented. Finally, section V concludes. Further details on the new budget rule of each signatory state within the Euro area are documented in the appendix.

Full press release

Full working paper

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