The authors of this column present a proposal to strengthen the European fiscal framework based on two elements: a revision of the fiscal rules, and a plan to create a European Debt Agency to absorb the debt accumulated during the pandemic.
Over the last few years, there has been a growing
consensus that the current rules of the Stability and Growth Pact are
outdated, too complicated, and not countercyclical enough. The authors
of this column present a proposal to strengthen the European fiscal
framework based on two elements: a revision of the fiscal rules, and a
plan to create a European Debt Agency to absorb the debt accumulated
during the pandemic. This first of two parts focuses on the fiscal rules
and proposes setting a ceiling on the growth rate of primary spending,
to be revised over three-year intervals, targeting debt reduction over a
ten-year horizon.
The severity of the Covid-19 pandemic and its adverse
effects on the economy have induced Europe to suspend the rules of the
Stability and Growth Pact by activating the general escape clause. In
January 2023, the escape clause will expire and, if nothing changes, the
old rules will be back in place, possibly forcing painful fiscal
adjustments in countries that are already struggling. Over the last few
years, there has been a growing consensus that the current rules are
outdated, too complicated, and not countercyclical enough. At the same
time, there have been positive developments in the ability of Europe to
pursue investment to address long-term challenges, such as the green
transition and digitalisation process, through the EU recovery
plan NextGenerationEU (NGEU).
In light of these developments, in Giavazzi et al. (2021) we offer a
proposal to strengthen the European fiscal framework based on two
elements: a revision of the fiscal rules, and a plan to create a
European Debt Agency to absorb the debt accumulated during the pandemic.
It is important to think about these two elements in conjunction, but
for exposition we divide our discussion here in two parts. In this first
column, we discuss the fiscal rules side; in a second column, we
discuss the debt management side. The overarching theme is that for the
EU to live up to its ambitions, it is necessary to rely on the capacity
of the Union to act as an effective central authority that can exercise
effective supervision on member states finances and, at the same time,
can take advantage of its enforcement powers to create additional fiscal
space for all members and use it wisely.
A medium-term debt target
The main objective of a fiscal rule is to define a predictable path
for public finances to ensure that investors are willing to purchase
public debt, provide a reliable source of funds when the need arises,
and avoid financial instability....
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