10 November 2022

CEPR's Buti ,Griis, Torre:How to make the EU fiscal framework fit for the challenges of this decade

After the Covid crisis and the economic fallout of Russia’s war of aggression, the EU fiscal rules will have to allow member states to rein in the burgeoning public debt, foster incentives to increase the quality of public finances, and tackle the pro-cyclical bias of fiscal behaviour.

This column outlines the European Commission’s proposal to increase national ownership within a common, simpler and hence more enforceable framework: a more gradual debt reduction would go hand in hand with national reforms and allocation of public investment spending fostering EU strategic priorities.

On 9 November 2022, the European Commission adopted a Communication on orientations for a reform of the EU economic governance framework (European Commission 2022). This proposal aims to address the main shortcomings of the current framework, taking into account the economic and social challenges of this decade, as made even more evident and pressing by the pandemic, the Russian war of aggression against Ukraine, and the ensuing energy crisis. The heart of the new framework is a revamped set of fiscal rules reforming the Stability and Growth Pact (SGP).

Since the Commission launched the review of the economic governance in February 2020, there has been a lively debate on the main shortcomings of the current framework and on how to address them. The following issues have been consistently identified by a wide range of stakeholders as the main challenges that a revamped framework should tackle:

• Very high public debt-to-GDP ratios. The financial and sovereign debt crises led to a significant increase in debt ratios, which then started to decline somewhat as of 2015 but with less progress where this was most needed. In 2020, the pandemic hit Member States harshly and asymmetrically, increasing debt levels as well as the heterogeneity in their fiscal and macroeconomic positions. With very high debt-to-GDP ratios and low economic growth, the debt reduction benchmark has not proved to be realistic, as also acknowledged in the German position paper and no debt-based excessive deficit procedure has ever been launched. To tackle high public debt, several contributors to the debate have called for greater differentiation in debt reduction trajectories to ensure gradual, realistic and steady adjustment paths (European Fiscal Board 2020, Martin et al. 2021).
• Limited incentives for investment and reforms to tackle today and tomorrow’s challenges. Pre-existing reforms and investment needs for an inclusive green and digital transition have been made even more pressing by the recent crises. At the same time, the war has also raised the importance of energy security as well as of common defence policy. Overall, the importance of a framework that puts sustainability and growth at par has been increasingly acknowledged, whereby fiscal plans should be designed in a way that is coherent with and facilitate growth and the achievement of common EU priorities (Bénassy-Quéré 2022, Darvas and Wolff 2022, D’Amico et al. 2022). Calls have also been made for a stronger EU budget or a central capacity for the provision of common EU public goods (EFB 2020, Buti and Messori 2022, Buti and Papacostantinou 2022)....

more at CEPR

© CEPR - Centre for Economic Policy Research