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Streamlined rules
The present system produces fiscal policy short termism, fine tuning of the rule book, and political loss of legitimacy. Bénassy-Quéré et al. propose a system of streamlined rules, based on debt levels and an expenditure rule, stronger national institutions, and market-based incentives, leading up to possible debt restructuring.
The proposed simplified rules are in accordance with proposals made by a wide variety of economists and institutions, including detailed work on the issue by the IMF. The details are not so important in the context of this comment. Such rules, however, should be able to deal with the tension of
This can rest on political enlightenment of the individual actors, on the threat of market sanctions, on the threat of Treaty-based sanctions, or by increasing the political costs of ‘bad’ fiscal policies. Political costs increase with transparency and information, and through critical dialogue.
How to stick to the rules: Increasing political costs
This should be a two-way system. For one, finance ministers should regularly explain their fiscal policy to a hearing in the European Parliament – less frequently if policies appear to be well on track, more often if not. If there are repeated or significant deviations the European Parliament may also wish to invite heads of state or government to such a hearing.
Transparency should also work better from Brussels to capitals. Both the commissioner in charge of this dossier, as well as the president of the Eurogroup, should be regular visitors to national parliaments in order to explain the euro area dimension of national fiscal policies. In the case of the latter that might well call for the installation of a full-time president of the Eurogroup.
The proposal by Bénassy-Quéré et al. relies on the good offices of national fiscal councils, which would be under the auspices of a central fiscal council. Experience to date with the fiscal councils has been quite mixed. Few have been able to establish themselves as independent, well-staffed institutions that increase critical transparency over national fiscal policies. Relying too heavily on such institutions appears mostly as another swing of the pendulum, handing back more responsibility to the member states as disenchantment with the Commission has spread.
Counting on these institutions to play a major role in ensuring good fiscal policies may be somewhat optimistic. What would be required, as a minimum, would be an agreement on staffing, expertise, independence, access to data, and methodological toolkits. Some of these already exist on paper, but are also followed only on paper. For these institutions to function well, as envisaged by Bénassy-Quéré et al., they would need to be perceived by the member states as an irritating control mechanism that is well heard in the national political discourse. Even in Spain and Portugal, where the fiscal councils are first rate, this is only partially the case. The European Fiscal Board could play an important role at the centre of such a system. Note that its present design ensures that it cannot influence current decisions.
An important institutional suggestion in the paper deals with separating the roles of ‘surveillance watchdog’ and political decision maker within the Commission, or even by moving the watchdog out of the house. Ultimately what counts is not the analysis, but how it is acted upon. This works well in the field of competition policy, which may influence the attractiveness in using this model for fiscal policy. Most important is transparency of what the rules require in terms of adjustment to fiscal policies. Put differently: if the watchdog barks, does anybody outside the Commission hear him barking? Such transparency could be achieved without extensive institutional reforms.
How intrusive?
Finally, one needs to reflect on the degree of intrusiveness of a system of fiscal rules, also in light of constitutional issues. Every presumed breaking of the rule book has resulted in further refinement of our rules. The Vademecum now has 244 pages. Granularity does not increase discipline. There may even have been at some stage a tendency to cover every conceivable situation through detailed rules, therefore putting national fiscal policies on something of an autopilot. The world does not work this way, politics even less so. This reinforces the view that interventions should deal with gross error, or significant deviations, not with issues that are somewhere behind the comma.
How effective?
The other side of the coin is the extent to which member states are willing to change the course of fiscal policy in light of interventions by ‘outsiders’. Past experience is mixed, and has shown on balance a larger degree of willingness of smaller member states to take criticism on board. Some member states find it outright inconceivable that their constitutional sovereignty on budgetary issues may be compromised by having to follow instructions from ‘Brussels’.
These issues show that the choices we are faced with in a number of areas also surface in the fiscal area:
In summing up: