CEPR's Buti ,Griis, Torre:How to make the EU fiscal framework fit for the challenges of this decade
10 November 2022
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.
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)....
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