Today, the European Fiscal Board (EFB) released its fourth annual report. The report assesses the implementation of the EU fiscal framework in 2019 and highlights several points of stress calling for future improvement.

The year 2019 marked the first time in almost two decades without any EU Member State under the excessive deficit procedure (EDP). Yet, the aggregate government deficit in the EU slightly increased for the first time since 2011, on the back of recurring slippages in current expenditure.

However, many governments had failed to build buffers in good times, a serial failure that impinged on some countries’ ability to absorb the economic impact of the pandemic this year.

The economic and social devastation left by the Covid-19 pandemic fully justified the activation of the general escape clause of the Stability and Growth Pact (SGP), allowing governments to respond to the crisis as they saw fit. However, as indicated in its report published in June, the EFB is of the view that the conditions under which to de-activate the clause should be reviewed soon.

The Covid-19 crisis has stressed three long-standing gaps in EMU’s architecture:

• a genuine and permanent central fiscal capacity;
• a lack of incentives to maintain or scale up growth-enhancing government expenditure;
• a reformed and leaner Stability and Growth Pact with a country-specific debt reduction rule .

The Next Generation EU and the SURE partly address the first two gaps, albeit on a temporary basis. As many Member States will come out of this crisis with historically high debt levels (often well above 100% of GDP), it is urgent to preserve a credible medium-term anchor for fiscal policies and, thus, to revive and preferably conclude the SGP reform process before the de-activation of the general escape clause. The EFB has already proposed to streamline and strengthen the framework by focussing on country-specific debt anchors achieved through an expenditure rule as single operational target.