## reffsfriea ## Source details **Canonical URL:** [reffsfriea](https://www.imf.org/-/media/files/publications/dp/2022/english/reffsfriea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2022/english/reffsfriea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2022/english/reffsfriea.pdf.json) --- ### Executive Summary — core findings - The EU’s fiscal framework needs reform: existing rules “did not prevent deficits and debt ratios that have threatened the stability of the monetary union” and “continue to create vulnerabilities today.” - Poor trade-off management: historically produced “too little fiscal adjustment in good times and too much in bad times.” - Insufficient EU-wide stabilization tools, “most visible during the decade following the euro area sovereign debt crisis” when “structurally low real interest rates stretched the policy tools of the European Central Bank (ECB).” - Proposed three-pillar framework: - Risk-based EU-level fiscal rules anchored to debt sustainability analysis (DSA) using a common methodology developed by a new and independent European Fiscal Council (EFC). - Strengthened national institutions and medium-term fiscal frameworks (MTFFs) with stronger national fiscal councils (NFCs). - An EU fiscal capacity (FCEU) to improve euro area stabilization and provide common public goods. ### Proposed EU-level fiscal rules — features and mechanics - Retain reference values: - 3 percent deficit and 60 percent debt reference values maintained. - Risk linkage: - Link speed and ambition of fiscal consolidation to the “level and horizon of fiscal risks” identified by DSA using the EFC methodology. - Treatment by risk category: - High-risk countries: required to enact expenditure ceilings consistent with a zero or positive overall fiscal balance over the medium term (“three to five years”). - Countries not high-risk and with debt below 60 percent and not projected to rise above 60 percent of GDP: more flexibility but must “consider fiscal risks when formulating their medium-term fiscal plans.” - Operational instrument: - Shift from expenditure benchmark based on potential output growth to “multiyear expenditure ceiling paths to reach the medium-term budget balance anchor and to reduce debt vulnerabilities.” - Escape clause: - Maintain the escape clause (extended through the end of 2023 as noted in the text). ### Strengthened national frameworks and institutions - MTFFs required features: - Coverage of the next “three to five years.” - Include macroeconomic and macro-fiscal projections (no-policy-change baseline), transparent costing of new measures, alternative scenarios. - Strengthened fiscal risk assessment and DSA; expenditure ceilings consistent with overall balance anchor. - Annual budgets must be consistent with these ceilings; ceilings changeable only in exceptional circumstances. - National Fiscal Councils (NFCs) expanded functions and standards: - Undertake or endorse macroeconomic projections and costing of fiscal measures. - Undertake DSAs and assess fiscal risk. - Take a view on whether proposed expenditure ceilings and fiscal plans are consistent with assessed fiscal risks. - Publish assessments of medium-term plans, expenditure ceilings, and annual budgets prior to enactment. - Upgrade to common EU-wide minimum standards for mandates, resources, and independence. - Governments must share key macro-fiscal data in a timely manner; principle of “comply or explain” for forecasts. - Independent European Fiscal Council (EFC): - Build on and replace the European Fiscal Board; fully independent from the European Commission; endowed with sufficient financial resources and full-time staff. - Responsibilities: - Develop common DSA methodology (in consultation with EC, NFCs, others). - Review/comment on NFC DSAs, risk assessments, and recommended expenditure ceilings. - Provide technical support to NFCs and serve as center of a peer network. - Issue regular reports assessing the fiscal framework and institutions; evaluate euro area fiscal policy stance and produce macroeconomic projections for the euro area and the European Union. - European Commission (EC) and Council roles preserved: - EC enforces directives on DSAs, MTFFs, and NFCs; provides opinions on NFC risk assessments; approves escape clause requests; can open an excessive deficit procedure (EDP) per Article 126 TFEU. - Council retains decision role envisaged in Article 126 TFEU, including sanctions. ### Fiscal information, accounting, and reporting upgrades - Accounting and statistics improvements: - Consolidated EU-level fiscal statistics. - Alignment of budgets with outturn information. - Comprehensive public sector balance sheets; accrual accounting reform; implementation of European Public Sector Accounting Standards (EPSAS) across member states envisioned. - Consistency and consolidation: - Full alignment of MTFFs, budgets, and fiscal outturns required. - Consolidated reporting on EU-level fiscal developments and debt (including EU budget and funds) to supplement national reports. - Harmonized reporting important if central fiscal capacity established; EU budget execution complexity and long lags noted as challenges. ### EU fiscal capacity (FCEU) — role, functions, and financing - Rationale and primary roles: - Improve euro area macroeconomic stabilization (macroeconomic stabilization instrument), especially when monetary policy is at the effective lower bound. - Provide common public goods (example: climate investment fund) to reduce adverse spillovers and facilitate rule implementation. - Possible instruments and design options: - Macroeconomic stabilization instrument: rainy-day fund or targeted cyclical expenditure fund (e.g., SURE-like); ESM proposed a loan-based fiscal stability fund alternative. - Climate Investment Fund (CIF): frontloaded, decades-long investments; mix of top-down prioritization and borrow elements of the RRF for country proposals. - Legacy-debt mutualization discussed as topic for a forthcoming paper; NGEU noted as mutualizing more than 40 percent of pandemic-related debt per some views. - Financing modalities: - Borrowing capacity paired with an income stream to service debt; common debt issuance and income stream envisaged. - New EU “own resources” or country contributions required; possible sources include a share of additional corporate income tax (CIT) revenue from international CIT reform, country contributions based on GNI, and earmarked revenues (for example, ETS). - Scale of green transition financing needs: - Preliminary estimates: additional public investments of about ½ to 1 percent of GDP per year on average (or 15–30 percent of EU GDP by 2050) needed to achieve EU emissions reduction goals. - Any EU CIF should aim to cover a significant fraction of this amount; war in Ukraine accelerates some investment needs. ### Implementation, governance architecture, and checks and balances - Governance architecture (central elements described): - MTFFs set multiyear expenditure ceilings to achieve overall balance anchor based on DSA. - Numerical fiscal rules ensure gradual decline in debt or fiscal vulnerabilities and build buffers in normal times while allowing countercyclical policies within rules. - Annual budgets set expenditures with a margin below ceilings. - NFCs undertake/endorse forecasts, assess consistency of plans, and assess fiscal sustainability risks. - EFC serves as central node for NFC network, sets DSA methodology, concentrates EU-wide fiscal competencies. - FCEU stabilizes shocks and provides common public goods. - EC preserves oversight and enforcement competences (including EDP). - Escape clause governance: - Escape clause could permit deviation or revision of expenditure ceilings with a transition period to return to the fiscal anchor. - Activation must be accompanied by improved checks and balances, including NFC assessments. ### Diagnosis of failures and empirical evidence - Main diagnosis: - Rules contributed to discipline but “did not prevent the euro area debt crisis nor the steady rises in debt ratios.” - Primary reason: rules were not followed—insufficient debt reduction in relatively good times (example episodes 1998–2007 and 2015–19) left inadequate buffers. - The 3 percent deficit ceiling created incentives to avoid an EDP but did not incentivize overperformance in good times. - MTO introduction (2005) and 1/20th debt correction rule (2011) did not prevent divergence between rules and outcomes. - Evidence cited: - “High fiscal sustainability risk in 10 EU countries” (EC 2022). - Counterfactual simulations indicate materially lower debt paths under stricter adherence (example: Italy could have entered the euro area debt crisis with a debt ratio of 70 percent of GDP instead of 100 percent under adherence scenarios). ### Simulations, methodological points, and key quantitative findings - Simulation framework: - Debt dynamics framework (Abbas and others 2013); fiscal multipliers decrease with output gap; multiplier set at 0.5 when output gap is zero in key simulations. - Nominal interest rate on new issuances increases with existing debt; risk premium rp_t increases with debt deviations and asymptotes to infinity as debt approaches d_max. - Counterfactual fiscal effort path {f_t} from 1992 onward; potential output y_t^– unchanged from baseline. - Counterfactual scenarios summarized: 1. Stricter adherence to SGP without escape clause: - Rule anchored on medium-term objective minimum balance (MTO MB); fiscal effort adjusted annually by up to 0.25 percent of GDP toward MTO MB. - If current overall balance below –3 percent of GDP, adjustment increases by an extra 0.25 percent of GDP (or minimum needed to reach –3 percent). - Rule applied from 1992. 2. Stricter adherence with an escape clause: - Escape clause triggered when the output gap is below –1.5 percent of potential GDP. - When triggered, fiscal effort set so overall balance matches its value in the data; escape clause modeled after 1999. - Italy simulation highlights: - Under stricter adherence in all periods: - Pre-GFC (2007) debt would have been about 30 percent of GDP lower than in the data. - Real GDP would have been about 1 percentage point lower in 2007. - During the GFC and euro area debt crisis, procyclical response nearly doubled the size of the output gap in Italy. - Italy’s debt ratio in 2017 would have been about 55 percent of GDP lower than in the data. - Under stricter adherence with the escape clause: - Escape clause would not have been activated before 2008; pre-GFC figures same as above. - Escape clause yields much better output outcomes during severe downturns: output gap less negative during 2008–17; real GDP nearly 1 percentage point higher in 2017. - Italian debt would have reached about 96 percent of GDP in 2017, 35 percentage points below the level seen in the data. - Proposed rule versus alternatives (Annex and Box comparisons): - Proposed rule pace of debt reduction more gradual than structural balance rule; adverse impact on output gap more modest. - Expenditure ceilings favored as operational rule: many EU countries already use them; they are simple, transparent, and place expenditures under policymakers’ control. - Expenditure ceilings should apply to general government and be consistent with planned revenue measures; not constrain desired size of government if paid by additional revenue. - Simulation-specific quantitative results: - Italy median outcome: in year 5 the median overall balance is effectively zero (–0.04% of GDP). - To achieve zero annual deficit in year 5, simulations require targeting a zero balance in second quarter of year 4. - Fiscal multiplier assumption: 0.5 in key simulations. - Expenditure rule empirical evidence: - Average forecast error across EU countries for 2005–19 over a two-year ahead horizon is about 1½ percent of GDP. - Countries with an expenditure rule exhibited on average significantly lower over-optimism: ½–¾ percent of GDP lower forecast error for the budget balance. - Regression example: forecast error for the fiscal balance about 0.6 percent of GDP lower for countries with an expenditure rule. ### Policy recommendations and design guidance - EU-level rule design: - Maintain 3 percent and 60 percent reference values; make pace and ambition contingent on DSA-based risk categories. - Use multiyear expenditure ceilings to reach medium-term overall balance anchor over “three to five years” for high-risk cases; allow more flexibility for low/medium-risk with explicit consideration of fiscal risks. - Institutional reforms: - Establish a fully independent EFC to set common DSA methodology, review NFC assessments, and produce euro-area macro projections. - Upgrade NFCs to EU-wide minimum standards (mandate, resources, independence); expand core functions (forecasts, costing, DSA, assessments). - Preserve EC surveillance and EDP enforcement roles; incorporate NFC and EFC inputs in oversight and escape clause adjudication. - Fiscal information and transparency: - Implement accrual accounting and EPSAS progressively; compile consolidated EU fiscal statistics and public sector balance sheets. - Standardize and expand information sharing with the EC; link MTFFs, annual budgets, and submissions to the Commission. - EU fiscal capacity: - Create an FCEU with borrowing capacity and income stream to service debt; finance via common debt issuance, new own resources, and negotiated country contributions. - Prioritize macro-stabilization instruments and climate-related investments (CIF) that materially address spillovers and leverage cross-country cost differences. - Ensure robust PFM, green budgeting, independent oversight, and phased evolution of FCEU design. - Compliance and credibility measures: - Strengthen NFCs and EFC to reduce forecast biases and improve adherence; use public assessments and market discipline to reinforce credibility. - Use escape clause sparingly with NFC/EFC/EC checks; require transition paths back to anchors after activation. *Italic source: Executive Summary and chapters/boxes from the IMF departmental paper “Reforming the EU Fiscal Framework” (reffsfriea).* ### Executive Summary ...............................................................................................vii ### reffsfriea - Executive Summary ...............................................................................................vii ### Executive Summary — core findings - The EU’s fiscal framework needs reform: existing rules “did not prevent deficits and debt ratios that have threatened the stability of the monetary union” and “continue to create vulnerabilities today.” - The framework has a poor track record at managing trade-offs between containing fiscal risks and stabilizing output; historically it produced “too little fiscal adjustment in good times and too much in bad times.” - The framework lacks sufficient tools for EU-wide stabilization; this was “most visible during the decade following the euro area sovereign debt crisis” when “structurally low real interest rates stretched the policy tools of the European Central Bank (ECB).” - The paper proposes a new framework built on three pillars: - Risk-based EU-level fiscal rules anchored to debt sustainability analysis (DSA) using a common methodology developed by a new and independent European Fiscal Council (EFC). - Strengthened national institutions and medium-term fiscal frameworks (MTFFs) with stronger national fiscal councils (NFCs). - An EU fiscal capacity (FCEU) to improve euro area stabilization and provide common public goods. ### Proposed EU-level fiscal rules — features and mechanics - Maintain the 3 percent deficit and 60 percent debt reference values. - Link the speed and ambition of fiscal consolidation to the “level and horizon of fiscal risks” as identified by DSA using a common methodology developed by the EFC. - High-risk countries would be required to enact expenditure ceilings consistent with a zero or positive overall fiscal balance over the medium term (“three to five years”). - Countries with fiscal risks not assessed as high, and with debt below 60 percent and not projected to rise above 60 percent of GDP, would have more flexibility but must still “consider fiscal risks when formulating their medium-term fiscal plans.” - Operational instrument shift: from the current expenditure benchmark based on potential output growth to “multiyear expenditure ceiling paths to reach the medium-term budget balance anchor and to reduce debt vulnerabilities.” - Maintain the escape clause (extended through the end of 2023 as noted in the text). ### Strengthened national frameworks and institutions - All member countries required to enact MTFFs consistent with EU-level rules, ensuring convergence to an “overall fiscal balance anchor” by setting expenditure ceilings. - NFCs must take on expanded functions: - Undertake or endorse macroeconomic projections. - Undertake DSAs and assess fiscal risk. - Take a view on whether proposed expenditure ceilings and fiscal plans are consistent with assessed fiscal risks. - NFCs must be upgraded to common EU-wide minimum standards for mandates, resources, and independence. - The European Commission (EC) continues its surveillance role (as articulated in the Maastricht Treaty). - The EFC would: - Develop the common DSA methodology. - Provide technical support to NFCs. - Review and comment on NFC assessments and recommendations, including on fiscal risk. - Serve as the center of a peer network of fiscal councils. - A major revamp in government finance statistics and fiscal information is required, including: - Consolidated EU-level fiscal statistics. - Alignment of budgets with outturn information. - Comprehensive public sector balance sheets. - Accrual accounting reform. - Upgraded information sharing with the EC for surveillance and publication. ### EU fiscal capacity (FCEU) — role and rationale - Two key roles for a well-designed FCEU: - Improve euro area macroeconomic stabilization via a macroeconomic stabilization instrument, especially when monetary policy is at the effective lower bound and to avoid procyclical cuts in growth-friendly spending. - Enhance resilience and provide common public goods (for example, via a climate investment fund), helping reduce adverse spillovers within the EU and facilitating implementation of EU fiscal rules. - Financing modality: the FCEU would be funded by common debt issuance and an income stream to service this debt (text indicates common debt issuance and an income stream without additional numeric specifics). ### Diagnosis of failures in the current framework - Rules contributed to fiscal discipline but “did not prevent the euro area debt crisis nor the steady rises in debt ratios” that remain a source of vulnerability. - Main reason for failure: the rules were not followed—insufficient debt reduction in relatively good times (for example, 1998–2007 and 2015–19) left insufficient buffers for bad times. - The 3 percent of GDP deficit ceiling created incentives to avoid an Excessive Deficit Procedure but failed to incentivize overperformance in good times. - Introduction of a medium-term objective (MTO) for the structural balance in 2005 and a minimum debt reduction requirement in 2011 did not prevent divergence between rules and outcomes. - Evidence cited: “high fiscal sustainability risk in 10 EU countries” (EC 2022) and counterfactual simulations showing materially lower debt paths had countries adhered to rules (example: Italy could have entered the euro area debt crisis with a debt ratio of 70 percent of GDP instead of 100 percent of GDP under adherence scenarios). ### Implementation and political economy considerations - The proposal emphasizes a mutually reinforcing relationship between EU rules and national-level implementation: stronger EU rules need stronger national ownership, and upgraded national frameworks increase the chance of successful rules-based governance. - The paper argues that rules must “convincingly balance the needs of members with the avoidance of negative externalities across members,” motivating the risk-based approach. - The EFC’s independent role and a networked upgrade of NFCs are presented as central to ensuring credibility, transparency, and better compliance. - The extension of the general escape clause through the end of 2023 is highlighted as a window of opportunity to agree timely reform. ### Urgency and timing - Reform “cannot wait”: multiple unprecedented shocks on top of already high debt levels complicate fiscal policy. - Rising interest rates and “monetary policy normalization continues apace,” increasing the need to agree reforms while the escape clause window exists. _Italic source: Executive Summary and Introduction from the IMF departmental paper “Reforming the EU Fiscal Framework” (Executive Summary ...............................................................................................vii)._ ### Box 1. The Evolution of the EU Fiscal Framework ### Box 1. The Evolution of the EU Fiscal Framework ### Historical reforms and milestones - The 1997 Stability and Growth Pact (SGP) included three EU-wide rules: ceilings of 3 percent of GDP for the overall fiscal deficit and 60 percent of GDP for public debt (corrective arm), and a requirement for medium-term budget positions to be “close to balance or in surplus” (preventive arm). - The 2005 reform of the SGP introduced country-specific medium-term objectives (MTOs) set in terms of structural fiscal balances to enhance economic rationale and flexibility. - The Six Pack reform in 2011 added an expenditure benchmark to the preventive arm and made the debt criterion operational by adding a debt correction rule that requires a country reduces by 1/20th the difference between its debt ratio and 60 percent of GDP. - The Two Pack reform in 2013 reinforced monitoring and surveillance in the euro area. - The 2013 Fiscal Compact, building on a 2011 Directive, called for countries to anchor the EU rules at the national level. - Responsibilities for national independent fiscal institutions were set out during 2011–13, and the European Fiscal Board (EFB) was established in 2016 as an advisory board to the European Commission. - In 2015, revised guidance on implementation of the SGP increased its flexibility to encourage investment and structural reforms, and to account for economic cycles. ### Key characteristics of the evolved framework - The framework retained the reference values of 3 percent of GDP (deficit ceiling) and 60 percent of GDP (debt ceiling) while layering additional operational and enforcement mechanisms (expenditure benchmark, debt correction rule, strengthened surveillance). - Country-specific MTOs and structural balance concepts were introduced to improve flexibility and economic grounding. - Enforcement strengthening focused on making the debt criterion operational (1/20th correction rule) and improving surveillance and monitoring instruments for euro-area members. ### Implementation and institutional changes - The 2011–13 reforms assigned roles to national independent fiscal institutions to improve national implementation and policy dialogue. - The European Fiscal Board (EFB) was created in 2016 to advise the European Commission. - The Fiscal Compact (2013) promoted anchoring EU rules at the national level, aiming to translate EU-level obligations into national frameworks. ### Implications and context noted in the Box (links to broader paper) - Subsequent chapters of the paper build on these reforms and address shortcomings, including enforcement and macroeconomic stabilization needs at the EU level. - The paper highlights that the framework’s successive reforms—while strengthening enforcement and surveillance—left open challenges such as procyclicality, insufficient central fiscal capacity for aggregate stabilization, and implementation shortfalls at the national level. *Source: IMF Departmental Papers — Reforming the EU Fiscal Framework (Box 1).* ### Box 2. The New Anchor and Operational Rule (continued) ### Box 2. The New Anchor and Operational Rule (continued) ### Comparison of the proposed rule with alternatives - Simulations (Annex 2) show how the proposed rule compares to a structural balance rule and the 1/20th rule. - Compared to the structural balance rule: - The pace of debt reduction is more gradual under the proposed rule. - The adverse impact on the output gap is more modest under the proposed rule. - Box Figure 2.2 (Implied Primary Balance): - Chart labels: Debt at 60%, Debt at 100%, Debt at 140%. - Scenarios shown where “b” denotes overall balance and “i” refers to effective nominal interest rates. - Figure annotation: i=1% i=2% i=3% for different b values (b=0, b=–1.5, b=–3). - Source: IMF staff calculations. ### Expenditure ceilings as the operational rule - Rationale for expenditure ceilings: - Expenditure ceilings are already widely used among EU countries (Manescu and Bova 2020). - Benefits cited: - Expenditures are under the direct control of policy-makers. - Rules are relatively simple and transparent, facilitating monitoring and communication. - Expenditure rules can contribute to stability of expenditures over the medium term, limiting the risk of fiscal policy procyclicality. - Empirical note: Noncyclical spending is already a key source of fiscal stabilization in EU countries (Box Figure 2.3). - At the national level, expenditure rules have reduced forecast biases (see Annex 3 for further details). - Coverage and design: - Expenditure ceilings should apply to the general government. - Ceilings should cover a broad definition of expenditures to ensure a clear link with fiscal sustainability and support proper resource allocation across spending priorities. - Consistency with revenues: - Expenditure ceilings need to be consistent with planned revenue measures (either revenue enhancing or decreasing measures) to ensure the medium-term anchor is achieved. - Ceilings should not constrain changes to the desired size of government if those changes are paid for by additional revenue. - Countries would have incentives to mobilize revenues (such as a carbon tax) to finance spending while meeting their overall balance anchors. ### Escape clause and transitional flexibility - An escape clause could permit: - A deviation from a previously set expenditure ceiling. - A revision of the forward path of expenditure ceilings, providing a transition period after activation that allows countries more time to gradually return to the fiscal anchor. - Any greater flexibility for individual countries under an escape clause must be accompanied by improved checks and balances in institutional implementation. ### Institutional implementation: national and EU-level roles - Objective: Promote robust national policy dialogue, greater national ownership, and improved implementation while preserving EU-level competencies for oversight and coordination. - National Fiscal Councils (NFCs) — strengthened role and standards: - NFCs would be upgraded through minimum standards for mandates, resources, and independence set by an EU directive, and organized into a peer network. - NFCs would be more integrated in fiscal planning and budget processes. - Core functions of NFCs would include: - Undertaking or endorsing medium-term projections (output, interest rates, and other economic variables) and costing of fiscal measures planned by governments that are inputs to the MTFF and debt sustainability analysis. - Assessing the degree of fiscal sustainability risks, using the EU common methodology—key input to prepare fiscal plans and decide on the anchor based on the overall fiscal balance. - Commenting on the implications (for deficits, debt, and fiscal risks) of the MTFF and expenditure ceilings proposed by governments and publishing an assessment of the medium-term plans, expenditure ceilings, and annual budgets prior to their enactment. - Assessing whether the conditions for invoking the individual escape clause are present. - Independent European Fiscal Council (EFC): - NFCs could be organized as a network with an independent EFC at its core, which would build on and replace the current European Fiscal Board. - The EFC would concentrate specific competences concerning overall fiscal policies in the euro area and the European Union, including the EU budget. - Responsibilities of the EFC would include: - Developing the common methodology for assessing fiscal sustainability risks of country members—in consultation with the EC, NFCs, and other stakeholders—and improving it over time. - Reviewing and commenting on the DSAs and risk assessments of the NFCs and on the recommended expenditure ceilings. - Promoting sharing of knowledge and experiences across countries and providing technical support to NFCs. - Issuing regular reports that assess the operation of the fiscal framework and the role of various institutions that are part of the framework, including NFCs and the EC, and making suggestions for improvement; including analysis of cross-country consistency of the risk ratings. - Evaluating the fiscal policy stance and the monetary–fiscal policy mix for the euro area as a whole; producing macroeconomic projections for the euro area and the European Union. - Note: If the EU budget assumes a broader role in provision of EU wide public goods and macroeconomic stabilization, there is a strong case for reinforced transparency and accountability. - European Commission (EC) and the Council of the European Union: - The EC would continue to: - Enforce the directives laying out minimum requirements for DSAs, MTFFs, and NFCs. - Provide an opinion on the risk assessments of the NFCs and undertake its own assessment. - Opine on the consistency of the MTFFs, expenditure ceilings, and annual budgets with the risk-based fiscal rules. - Approve any request to trigger the individual escape clause, taking into account the NFC assessment. - Contribute to enforcement by exercising its power to open an excessive deficit procedure (EDP) in accordance with Article 126 of the TFEU. An EDP could be triggered by either: 1) failure of the expenditure ceilings and MTFFs to follow the rules, leaving them out of line with the EC’s risk assessment (a prospective excessive deficit), or 2) failure of government to stay within the expenditure ceilings (excessive deficit ex post), also taking account of the size of the deficit and other relevant information. - The Council of the European Union would continue its role envisaged in Article 126 of the TFEU, including deciding on sanctions. ### Governance architecture and operational flow (Figure 6) - Central elements: - Medium-term fiscal framework (MTFF): - Macro-fiscal scenarios. - Set multiyear expenditure ceilings to achieve the overall balance anchor in the medium term based on debt sustainability risks. - Ensure deficits below 3 percent limit. - Account for fiscal risks. - Numerical fiscal rules: - Ensure gradual decline in debt or fiscal vulnerabilities. - Build up buffers in normal times. - Allow countercyclical policies within the rules-based framework. - Annual budgets and fiscal outcomes: - Budgets would set expenditures with a margin below the ceilings. - National fiscal councils: - Undertake or endorse independent macro-fiscal forecasts and costing of fiscal measures. - Assess consistency of fiscal plans and budgets. - Assess fiscal sustainability risks. - EU Fiscal Capacity: - Stabilize shocks. - Provide common public goods. - Help abide by fiscal rules. - European Commission: - Preserves existing competencies and oversight functions. - Independent European Fiscal Council: - Serves as a central node for a network of NFCs; sets DSA methodology; concentrates specific competencies concerning EU-wide overall fiscal policies. - Figure 6 note: DSA = debt sustainability analysis; NFCs = national fiscal councils. ### Fiscal stabilizers in the euro area (Box Figure 2.3) - The size of fiscal stabilizers is estimated as a semi-elasticity multiplied by a standardized output gap of 1 percent of potential GDP; due to the ESCB method, presented automatic stabilizers are expressed in cumulative terms over three years (T–T+2). - Chart range labels indicate values from –0.4 to 0.8 (Percent of GDP) across country ISO codes and an euro area (EA) average indicated as a weighted average using nominal GDP in 2019. - Components shown in the figure: Non-cyclical expenditure, Unemployment benefits, Non-cyclical revenue, Cyclical revenue, Total. - Source: European System of Central Banks. Data provided by the European Central Bank (ECB). *Source: IMF DEPARTMENTAL PAPERS • Reforming the EU Fiscal Framework (Box 2 continued).* ### 4. Fiscal Institutions: Strengthening the National ### 4. Fiscal Institutions: Strengthening the National Policy Dialogue and National Ownership ### A. Upgrading National Medium-Term Fiscal Frameworks (MTFFs) - Objective: strengthen incentives for national governments to adopt sound policies through greater transparency and checks and balances at the national level. - Role of MTFFs: provide the strategic framework to guide the annual budget process; EU legislation already requires countries to establish medium-term budgetary frameworks for fiscal planning. - Identified weaknesses: - Weak link in some member states between national medium-term plans submitted to the European Commission, national multiyear economic plans, and national annual budgets. - Weak capacity in risk assessment when preparing budgets in many member states. - Recommended MTFF design features: - Coverage of the next three to five years and presentation within a comprehensive fiscal strategy and a fiscal risk assessment. - Include three key elements: - A set of macroeconomic and macro-fiscal projections, containing a (no-policy change) baseline, transparent costing of new fiscal measures, and alternative scenarios. - A strengthened assessment of fiscal risks and debt sustainability analysis; expanded risk analysis of NFCs will provide additional and independent input and inform the medium-term fiscal balance anchor. - Consistent with this anchor, expenditure ceilings for the next three to five years; annual budgets must be consistent with these ceilings, and ceilings could not be changed except in exceptional circumstances. Examples: Sweden sets a nominal expenditure ceiling over a three-year period with the outer year added annually; the Netherlands introduces four-year expenditure ceilings over the government term. - Fiscal strategy document: - Should provide context for the MTFF, set out government policy plans for budgetary programs and risk containment, and respond to concerns formally raised by NFCs. - Linkages: - Annual budgets should be linked to and consistent with MTFFs; key parameters such as the overall balance target or expenditure ceilings need consistency with binding targets in medium-term plans. - Close linkage among MTFF, annual budgets, and plans submitted to the European Commission is required. ### B. Strengthening Fiscal Councils - Role: independent voice and technical expertise to enhance transparency, accountability, and credibility of fiscal policy; deter backloading of adjustment; increase reputational costs of policy slippages; strengthen checks and balances and national policy dialogue. - Current situation: - Considerable heterogeneity across countries in institutional capacity, proficiency, experience, operational independence, and key functions (mandates, tasks, access to information) (Davoodi and others 2022). - Only about two-thirds of national fiscal councils in the EU have some media impact. - Evidence: Mohl and others (2021) show more media visibility makes fiscal rules more effective as judged by higher rule compliance. - Several fiscal councils (Belgium, The Netherlands) prepare macroeconomic forecasts used in government budgets; longstanding examples with broad mandates and public visibility include the United Kingdom’s Office for Budget Responsibility, the CPB Netherlands Bureau for Economic Policy Analysis (CPB), and Sweden’s Fiscal Policy Council (Annex 4). - Minimum standards and expected functions for effective fiscal councils: - Mandate to prepare or endorse independent macroeconomic and macro-fiscal forecasts. - Cost key expenditure and revenue policies. - Conduct forecast error analysis. - Assess debt sustainability. - Assess whether government medium-term fiscal plans and annual budgets (deficit and debt paths) are consistent with fiscal rules. - Assess and voice views on fiscal risks and concerns on fiscal sustainability. - Communicate and publish assessments regularly, with additional outreach as useful. - Data sharing and accountability: - Governments must share key macro-fiscal data in a timely manner with NFCs (underscored by the EU network of IFIs (2021)). - Governments should commit to the principle of “comply or explain”: government may use its own forecast only with an obligation to justify publicly deviations from fiscal council forecasts, or use a forecast accredited by the fiscal council. - Role in escape clauses and EU-level assessments: - Fiscal councils could have a voice in activation/deactivation of escape clauses for country-specific shocks; government could request activation in consultation with the fiscal council. - Fiscal councils could assess adequacy of fiscal plans once escape clause is activated. - Views of national fiscal councils should be taken into account in assessments by European institutions. - European Fiscal Council (EFC) proposal: - A fully independent European Fiscal Council should become the center of an EU-wide network of fiscal councils and exercise checks and balances at the EU level (replace the EFB). - EFC should be fully independent from the European Commission and endowed with sufficient financial resources and a dedicated full-time staff with requisite skills. - The EFC would be the central node for a network of national fiscal councils to develop a community of practice and best standards over time. - Market discipline and transparency: - Better transparency and a network of independent national fiscal councils should facilitate market participants’ risk assessments and foster adherence through market discipline. - Evidence: Kalan and others (2018) show countries placed under an EDP have significantly higher spreads, suggesting better communication and transparency can foster compliance through market discipline (Figure 7). - Public statements and reports by national fiscal councils could help deter further buildup in debt, especially when risks are assessed as low or medium but debt is on an increasing trajectory. ### C. Upgrading Fiscal Information: Coverage, Consistency, and Consolidation - Objective: continued upgrades in quality of fiscal information covering accounting and government finance statistics. - Accounting improvements: - Develop source data from accounting information to complement cash accounting with accrual and balance sheet information. - Implementation of European Public Sector Accounting Standards (EPSAS) across all member states would permit presentation of a comprehensive and reconciled public sector balance sheet to view government actions and risk exposures. - Full accrual accounting in all EU members would improve basis for preparing EU-wide statistics, including consolidated statistics; an incremental approach is conceivable. - A systematic inventory of assets and liabilities would improve analysis of government net worth and valuation of public sector investments. - Consistency and alignment: - Full alignment of information presented in MTFFs, budgets, and fiscal outturns is needed because national budgets using national standards often deviate from harmonized statistical fiscal information used by EU institutions. - Greater weight on national MTFFs for EU-level commitments elevates the need for transparency and alignment of national fiscal information with EU-wide standards. - Consolidated EU reporting: - Reporting and transparency on the overall EU fiscal position should expand coverage to include the EU-level budget, fiscal operations, and EU-level debt. - Consolidated reporting on EU-level fiscal developments and debt, including EU budget and funds, should supplement national fiscal reports to monitor overall debt and fiscal capacity. - Consolidated reporting becomes more important if a central fiscal capacity is established for common public goods or macroeconomic stabilization and would facilitate coordination with monetary policy. - Data development work is required; EU budget execution is complex with long lags, making harmonized reporting between the EU and member countries a challenge. ### D. Upgrading Information Sharing with the European Commission - Standardization and expansion: - Fiscal information shared with the Commission should be suitably standardized and expanded for the benefit of all member states and independent observers such as NFCs. - Information under the European Semester is governed by the “Code of Conduct of the SGP” and covers essential information for macro-fiscal monitoring and drivers of fiscal pressures; these submissions, published by the Commission, form the core of forward-looking harmonized fiscal information. - Reporting on policy plans is uneven across member states; expanded information should suitably cover national MTFFs and ensure close linkage among MTFFs, annual budgets, and commitments submitted to the European Commission. - Preservation of EU-level oversight: - Proposed reforms preserve existing oversight at the EU level; all member states remain subject to regular surveillance and provision of a core set of information on fiscal positions and plans. - EU institutions remain entitled to seek additional information and consultation appropriate to the degree and source of risk and mitigating actions taken by member states. - In extremis, the excessive deficit procedure foreseen in the treaties could be opened. *Source: IMF Departmental Paper — Reforming the EU Fiscal Framework, chapter 4.* ### 5. An EU Fiscal Capacity ### 5. An EU Fiscal Capacity ### A. Role of the EU Fiscal Capacity - Rationale: - The pandemic and war in Ukraine highlighted vulnerabilities in the EU’s economic architecture and the need for an EU fiscal capacity (FCEU) to enhance resilience, provide common public goods, and strengthen macro-stabilization. - A well-designed FCEU could reduce the need for monetary policy to shoulder shocks, especially when policy is constrained at the effective lower bound for interest rates, and help avoid procyclical cuts to growth-friendly spending during downturns. - By enhancing resilience and reducing adverse spillovers, an FCEU would support better implementation of EU fiscal rules. - Possible functions and instruments: - Macroeconomic stabilization instrument: - Could smooth country-specific shocks that monetary policy cannot address and facilitate an appropriate mix of fiscal and monetary support for common shocks. - Could be designed as a rainy-day fund (build assets in good times and transfer in bad times) or as a fund targeted to a specific cyclical expenditure (for example, a SURE-like instrument to finance job retention schemes). - The ESM (2022) has proposed a loan-based fiscal stability fund as an alternative, arguing it could better address moral hazard and be more easily established. - Provision of common public goods: - Support the green transition and other areas where externalities, market failures, leakage, and cross-border spillovers exist. - The Recovery and Resilience Facility (RRF) is cited as an important step toward common EU funding for green and digital investment needs. - Climate Investment Fund (CIF) under the FCEU: - Rationale: climate change requires frontloaded but decades-long efforts; complement carbon pricing and internalize cross-border spillovers. - Potential benefits: 1. Better internalize spillovers from reducing greenhouse gas (GHG) emissions. 2. Exploit differences in abatement costs across countries. 3. Better coordinate cross-border investments and R&D. 4. Ensure required investments occur despite political or fiscal constraints. - Design considerations: - Top-down prioritization for some investments (for example, cross-border grid interconnections, R&D). - For a large share of funds, borrow elements of the RRF so countries can propose emission-reduction projects (including job reskilling programs). - Cross-border transfers: - A CIF oriented toward cost-effective emission reductions may entail larger short- to medium-term allocations to some countries (for example, to replace coal-fired plants in Eastern Europe). - Over the long term (to 2050), cross-border transfers would likely be limited as cumulative investment needs across countries are similar (as a share of GDP). - The CIF could be explicitly designed to ensure similar cumulative investments, possibly with some efficiency costs. - Legacy-debt mutualization: - Views differ and the topic will be covered in a forthcoming paper. - Potential benefits of one-off mutualization include lower national debt levels, a larger stock of an EU-wide safe asset, and better alignment of fiscal and monetary incentives (Giavazzi and others 2021). - Concerns include moral hazard if mutualization is not perceived as one-off; some argue NGEU already effectively mutualizes more than 40 percent of pandemic-related debt. ### B. Financing Modalities for the FCEU - Core financing design: - The FCEU should have a borrowing capacity paired with an income stream to service debt. - Similar to NGEU, the FCEU should be able to tap capital markets to raise funds for common goods and macro-stabilization; this would also create an EU-level safe asset for a prolonged period as NGEU debt will be extinguished by 2058. - Revenue and burden-sharing options: - New EU “own resources” or country contributions would be required; exact burden sharing is a political choice. - Example proposal: a share of additional corporate income tax (CIT) revenue from international CIT reform to service NGEU debt—provides a cyclical revenue source that enhances countercyclicality. - Country contributions (for example, based on gross national income (GNI)) are an option but politically difficult. - Likely funding mix: negotiated country contributions and new own resources. - Earmarked EU-level revenues (for example, emission trading schemes (ETS)) are possible, though the ETS tax base would shrink as climate objectives are reached. - Scale and timing of green transition financing needs: - Preliminary estimates suggest additional public investments of about ½ to 1 percent of GDP per year on average (or 15–30 percent of EU GDP by 2050) are needed to achieve the EU’s emissions reduction goals (EC 2021, Darvas and Wolff 2021). - Any EU CIF should aim to cover a significant fraction of this amount. - The war in Ukraine and the push for faster decoupling from fossil fuels are likely to bring forward investment needs, particularly in renewables, to advance energy security. ### C. Other Considerations for the FCEU - Operational design and project selection: - The FCEU could borrow elements of the RRF design. - Investment selection could be centrally identified (top-down) or country-proposed (bottom-up). - Given the need for coordination for common public goods, the FCEU would need to be more top-down than the RRF, though countries could still propose projects accounting for a large share of total funding. - A robust methodology for prioritizing investment projects is required. - Public financial management and accountability: - Strengthening public financial management (PFM), especially for green investments, is essential. - Develop and implement common green budgeting and green PFM practices (Gonguet and others 2021). - Over time, FCEU PFM should focus on fiscal transparency and accountability through independent assessments by national fiscal councils and the EFB. - Regular communication and engagement with EU citizens, parliamentarians, and policymakers are essential to secure stakeholder buy-in. - A strong public investment management process would mitigate practical shortcomings previously identified regarding a golden rule. - Evolution and flexibility: - The FCEU should be designed to evolve over decades, allowing learning and process improvements. - One option is incorporating the FCEU into the EU budget process as a separate layer similar to the RRF, enabling periodic reassessment of investment priorities and incorporation of lessons learned. ### Annex: Key methodological points and counterfactual simulation findings (summary) - Simulation framework: - Based on a debt dynamics framework (Abbas and others 2013) modeling effects of alternative structural fiscal adjustment paths on fiscal balances, interest rates, output, and debt. - Key features: - Fiscal multipliers decrease with the output gap (varying over the [0,1] interval, with the multiplier set at 0.5 when the output gap is zero). - Nominal interest rate on new issuances increases with existing debt level. - Risk premium term rp_t is an increasing function of debt deviations and asymptotes to infinity as debt approaches d_max. - Counterfactual fiscal effort path {f_t} from 1992 onward; potential output y_t^– unchanged from baseline. - Counterfactual scenarios: 1. Stricter adherence to SGP without escape clause: - Rule anchored on medium-term objective minimum balance (MTO MB); fiscal effort adjusted annually by up to 0.25 percent of GDP toward MTO MB. - If current overall balance is below –3 percent of GDP, adjustment increases by an extra 0.25 percent of GDP (or minimum needed to reach –3 percent). - Rule applied from 1992. 2. Stricter adherence with an escape clause: - Escape clause triggered when the output gap is below –1.5 percent of potential GDP. - When triggered, fiscal effort is set so that the overall balance matches its value in the data (looser policy in severe downturns). - Escape clause modeled after 1999; not equivalent to the SGP “general escape clause.” - Summary of simulation results (Italy examples): - Under stricter adherence in all periods: - Pre-GFC (2007) debt would have been about 30 percent of GDP lower than in the data. - Real GDP would have been about 1 percentage point lower in 2007. - During the GFC and euro area debt crisis, the procyclical policy response would have been larger, nearly doubling the size of the output gap in Italy. - Despite larger output costs, debt falls: Italy’s debt ratio in 2017 would have been about 55 percent of GDP lower than in the data. - Under stricter adherence with the escape clause: - Escape clause (as defined) would not have been activated before 2008, so pre-GFC figures same as above. - The escape clause yields much better output outcomes during severe downturns: - Output gap is less negative than in the data during 2008–17; level of real GDP nearly 1 percentage point higher in 2017. - Italian debt in the scenario would have reached about 96 percent of GDP in 2017, 35 percentage points below the level seen in the data. *Source: IMF staff (chapter 5, “An EU Fiscal Capacity,” from the IMF Departmental Paper).* ### Annex Figure 1.1. Stricter SGP Compliance— ### Annex Figure 1.1. Stricter SGP Compliance— ### Simulations of Proposed Rule Versus Current Rules — Methodology - Framework: - Modified stochastic simulation approach developed in Caceres and Ruiz-Arnaz (2010) using a Vector Autoregression (VAR) framework. - Simulates projections for key macro-fiscal variables under different rules, subject to shocks to the output gap and real interest rate. - Models two current rules: the “1/20th rule” (debt correction mechanism) and a structural balance rule. - Models an illustrative implementation of the proposal: medium-term anchor = zero overall balance and a medium-term expenditure path delivering gradual, sustained fiscal adjustment to reduce debt. - Key equations and definitions (as given): - Output gap: y⁻t, unconditional mean y⁻. - Nominal expenditure growth GE defined by: 1 1 GE 5 ( rev0 1 R ӯ _ exp0 ) 1 _ T (1 1 ḡy ) (1 1 ӯ) 1 _ T (1 1 p) - Evolution of expenditure ratio: exp t 5 exp t21 (1 1 Gt E ) __ (1 1 gt y ) (1 1 p) - Iterated expression for expT provided and shown to imply balance at time T approximately zero except for deviations of y⁻t from y⁻. - After T, nominal expenditure grows at rate 1 1 GE 5 (1 1 gt y ) (1 1 p). - The vector Y (first element = output gap) follows VAR(2) when fiscal multiplier is zero: Y t 5 C 1 A1 Y t21 1 A2 Y t22 - Unconditional mean of the output gap (with zero fiscal multiplier): ӯ 5 e1 ( I3 2 A1 2 A2 ) C , where I3 is 3x3 identity and e1 = (1,0,0). - Simulation assumptions explicitly stated: - Fiscal multiplier assumed = 0.5 (the factor by which structural balance or expenditure adjustment impacts output). - Data for shocks drawn from 2000:Q1–2019:Q4. ### Italy Simulations — Median Results and Interpretation - Key median outcomes for Italy: - In year 5 the median overall balance is effectively zero (–0.04% of GDP). - To achieve an annual deficit of zero in year 5, simulations require targeting a zero balance in the second quarter of year 4. - Policy/implementation implication: - Countries may need to overshoot or build in buffers to expenditure plans to compensate for the growth impact of fiscal adjustment. - Multipliers and policy quality: - Assumed fiscal multiplier = 0.5. - If expenditure reductions cut productive spending (public investment, education, transfers to low-income households), the multiplier would likely be larger, amplifying negative output impact and arguing for extending convergence by a year or two. - Simulations do not incorporate hysteresis effects that could make impacts more persistent. - Comparative dynamics: - For medians with effectively no shocks to output gap and real interest rate: - The proposal delivers as much debt reduction as the structural balance rule over 8–10 years. - The proposal’s pace is more gradual, leading to a less negative impact on the output gap. - The “1/20th rule” would require a politically infeasible fiscal adjustment of more than 4 percentage points of GDP in the first year; mechanically it delivers a lower long-term debt ratio but with sharper near-term adjustment. ### France Simulations and Fan Charts - France median dynamics: - France’s debt ratio is lower than Italy’s so differences between rules are smaller, particularly between the 1/20th rule and the others. - Medians show debt coming down more slowly initially under the proposal (more gradual expenditure reduction) but delivering similar levels of debt reduction over a 10-year horizon. - The more gradual expenditure reduction under the proposal has a less deleterious impact on the output gap, while requiring slightly more ambition over a longer time horizon. - Fan chart (distributional) findings: - Fan graphs for Italy and France suggest the zero overall balance anchor would be sufficient to stabilize or reduce debt over a 5-year period with high probability (as defined by the 95th percentile of the distribution). - Caveat: fan graphs exclude tail risk events; the spread is determined by properties of the data period (2000:Q1–2019:Q4), which includes the global financial and euro area debt crises. ### Strengthening Compliance by Reducing Forecast Biases - Empirical regularities and problems: - Most governments are too optimistic in medium-term fiscal forecasts; negative average forecast error for budget balances two years ahead. - Large cross-country variation; countries with larger forecast errors are associated with less compliance with EU fiscal rules. - Example: during 2008–11 average compliance dropped to 43 percent, down from 70 percent for previous years. - Negative forecast errors mostly reflect an under-projection of expenditures. - Role of medium-term expenditure planning: - Deficiencies in medium-term expenditure planning undermine compliance. - To operate effectively, proposed expenditure ceilings should be underpinned by strong medium-term budget frameworks. - The Code of Conduct of the SGP requires some reporting but practices are uneven and adherence relatively weak. - Recommendations to improve compliance and planning: - More scrutiny via regular and visible analysis of deviations from medium-term forecasts, covering forecast errors and implementation of past policy commitments. - Systematic regular spending reviews to analyze effectiveness of national expenditure policies and find ways to release fiscal space for priorities. ### Annex Box 3.1 — Expenditure Rules and Forecast Biases (Empirical Evidence) - Magnitudes and stylized facts: - Over a two-year ahead horizon, the average forecast error across EU countries for the episode 2005–19 is about 1½ percent of GDP. - Countries that comply better with EU fiscal rules also have an optimism bias but tend to compensate expenditure under-projection with overly prudent revenue projections. - EU countries with an expenditure rule exhibited on average significantly lower over-optimism (½–¾ percent of GDP lower forecast error for the budget balance) due to lower under-projection of expenditures in the near and medium term. - Example regression result: the forecast error for the fiscal balance is about 0.6 percent of GDP lower for countries that have an expenditure rule than in countries without such a rule (at all three forecast horizons). - Coverage matters: forecast bias is about ½ (2) percent of GDP lower in the contemporaneous year (two years ahead) if expenditure covers the entire general government as opposed to only parts of the expenditures. - Empirical approach (as presented): - First OLS regression estimating k-years ahead forecast error of fiscal balance DFB i,t t1k as a function of: - Expenditure rule dummy (ER i,t ), political factors (POL i,t ), economic conditions (ECO i,t ), other controls (X i,t ), and constant c k . - Second regression (conditional on an expenditure rule being in place) analyzes design elements FIS i,t (multiyear ceilings, legal basis, monitoring outside government, sectoral coverage, enforcement). - Data sources and coverage: - Forecast errors database compiled by IMF’s Fiscal Affairs Department using national forecasts in Stability and Convergence Programs and WEO realized data. - Fiscal rules and institutions from IMF Fiscal Rules Dataset, 2021. - Data covers all EU countries with available data from 2005–19. - Interpretation cautions: - Coefficient estimates, especially from the second regression, should be interpreted with caution due to limited sample size and collinearity among covariates (many dummies). ### Annex 4 — Effective Fiscal Councils - Desirable features of effective fiscal councils (summary of principles): - Clear mandates (monitoring/reporting fiscal rules, assessing/preparing macro-fiscal forecasts, costing of fiscal measures). - Broad national/local ownership across political spectrum. - Strict operational independence from politics. - Sufficient resources commensurate with mandate. - Mechanisms for accountability to the legislature (reports, formal consultations, testimonies to budget committees). - Full access to macro-fiscal information in a timely manner. - Full transparency in decision making and reporting. - Mechanism for regular external evaluation and peer review. - Strong internal governance (expert advisory board to oversee quality of work program). - No one-size-fits-all: - Mandate, tasks, institutional models must reflect country-specific characteristics (human/financial capacities, political traditions, causes of excessive deficits/debts). - Minimum standards recommended for national fiscal councils in a monetary union like the EU to minimize cacophony in fiscal policy messaging and to ensure strong positions nationally and at EU level. - Empirical and institutional examples: - External review of the UK Office for Budget Responsibility (OBR) in 2020 concluded OBR delivers high-quality publications, reduces bias in official forecasts, and increases transparency. - Sweden’s fiscal council and framework credited with bringing debt from more than 70 percent of GDP in mid-1990s to 35 percent of GDP. - Netherlands’ IFIs (Council of State and CPB) raised concerns about medium-term projections in Spring 2021 Stability and Convergence Plans; eight EU national fiscal councils raised concerns about content and implementation of national Recovery and Resilience Plans (European Fiscal Monitor June 2021). - Lessons from Dutch CPB: reputation of quality and independence is crucial; building reputation takes time; broad scope of analyses contributes to shared public understanding of trade-offs. - Fiscal councils in advanced economies (Germany, Sweden, United Kingdom) have contributed to analysis of monetary-fiscal policy interaction, debt servicing costs, maturity structure, and asset-liability management of public sector balance sheets. *IMF DEPARTMENTAL PAPERS • Reforming the EU Fiscal Framework (selected annex figures and text).* ### References ### References ### Major themes and representative citations - Sovereign distress and fiscal crises - Abbas, S. 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Lessons from the Crisis: Minimal Elements for a Fiscal Union in the Euro Area in C. Cottarelli and M. Guerguil (eds.). Designing a European Fiscal Union. London: Routledge. - Andrle, M., J. Bluedorn, L. Eyraud, T. Kinda, P. Koeva Brooks, G. Schwartz, and A. Weber. 2015. “Reforming Fiscal Governance in the European Union,” IMF Staff Discussion Note No. 15/09, International Monetary Fund, Washington, DC. - Annett, A. 2006. “Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change under Europe’s Fiscal Framework.” IMF Working Paper 06/116, International Monetary Fund, Washington, DC. - Darvas, Z., P. Martin, and X. Ragot. 2018. European Fiscal Rules Require A Major Overhaul. 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Ragot. 2021b. “Pour une refonte du cadre budgétaire européen.” Les notes du conseil d’analyse économique, 63 (April). - Giavazzi, F., V. Guerrieri, G. Lorenzoni, and C. H. Weymuller. 2021. “Revising the European Fiscal Framework.” - Fiscal institutions, fiscal councils, and national frameworks - Beetsma, R. and X. Debrun. 2018. Independent Fiscal Councils: Watchdogs or Lapdogs? CEPR, London. - Bova, E., and C. B. Manescu. 2020. National Expenditure Rules in the EU: An Analysis of Effectiveness and Compliance, European Economy Discussion Paper 124, European Commission, Luxembourg. - Davoodi, H., P. Elger, A. Fotiou, D. Garcia-Marcia, X. Han, A. Lagerborg, W. R. Lam, and P. Medas. 2022. “Fiscal Rules and Fiscal Councils: Recent Trends and Performance During the COVID-19 Pandemic.” IMF Working Paper No. 2022/11, International Monetary Fund, Washington, DC. - EU Network of Independent Fiscal Institutions. 2021. “EU Fiscal and Economic Governance Review: Contribution from the Network of Independent EU Fiscal Institutions.” - Organization for Economic Cooperation and Development. 2014. “Recommendation on Principles for Independent Fiscal Institutions.” February. - Organization for Economic Cooperation and Development. 2020. “OECD Review of the Office for Budget Responsibility (OBR) of the United Kingdom.” September. - Fiscal forecasting, data revisions, and transparency - Beetsma, R., B. Bluhm, M. Giuliodori, and P. Wierts. 2011. “From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU.” Tinbergen Institute Discussion Papers 11-080/2, Tinbergen Institute. - Cimadomo, J., 2016. “Real-Time Data and Fiscal Policy Analysis: A Survey of the Literature.” Journal of Economic Surveys 30 (2): 302–26 - Jonung, L., and M. Larch. 2006. “Improving Fiscal Policy in the EU: the Case for Independent Forecasts.” Economic Policy 21 (47): 492–534. - Pina, Á., and N. Venes. 2011. “The Political Economy of EDP Fiscal Forecasts: An Empirical Assessment.” European Journal of Political Economy 27 (3): 534–46. - Larch, M., J. Malzubris, and M. Busse. 2021. “Optimism is Bad for Fiscal Outcomes.” SUERF The European Money and Finance Forum Policy Brief No. 234 (November). - Larch, M., M. Busse, and L. Jankovics. 2011. “Enforcement of Fiscal Rules: Lessons from the Fiscal Compact.” ZEW - Centre for European Economic Research Discussion Paper No. 21-085 (December). - Fiscal multipliers, effectiveness at low rates, and macro tools - Christiano, L., M. Eichenbaum, and S. Rebelo. 2011. “When Is the Government Spending Multiplier Large?” Journal of Political Economy 119 (1) (February). - Eggertsson, G. B. 2010. “What Fiscal Policy Is Effective at Zero Interest Rates?” in NBER Macroeconomics Annual, Vol. 25. - Woodford, M., 2011. “Simple Analytics of the Government Expenditure Multiplier.” American Economic Journal: Macroeconomics 3 (1). - Blanchard, O., A. Leandro, and J. Zettelmeyer. 2021. “Redesigning EU fiscal rules: From Rules to Standards.” Economic Policy. - Green fiscal policy, climate-sensitive public finance management, and investment - Darvas, Z., and G. Wolff. 2021. “A Green Fiscal Pact: Climate Investment in Times of Budget Consolidation.” Policy Contribution, Bruegel, September 9. - Gonguet, F., C. P. Wendling, Ozlem. A. Sakrak, and B. Battersby. 2021. “Climate-Sensitive Management of Public Finances—’Green PFM.’” IMF Staff Climate Notes 2021/002, International Monetary Fund, Washington, DC. - European Commission (EC). 2020c. “Impact Assessment” accompanying the document “Stepping up Europe’s 2030 climate ambition: Investing in a climate-neutral future for the benefit of our people.” September 17, Brussels. - Policy proposals, frameworks, and commentary on EU reform - Arnold, N., B. Barkbu, H. E. Ture, H. Wang, and J. Yao. 2018. “A Central Fiscal Stabilization Capacity for the Euro Area.” IMF Staff Discussion Note 18/03 International Monetary Fund, Washington, DC. - Arnold, N., and D. Garcia-Macia. Forthcoming. “Adherence to the Stability and Growth Pact: Counterfactual Scenarios.” IMF Working Paper. - Giavazzi, F., V. Guerrieri, G. Lorenzoni, and C. H. Weymuller. 2021. “Revising the European Fiscal Framework.” - Maduro, M., P. Martin, J. C. Piris, J. Pisani-Ferry, L. Reichlin, A. Steinbach, and B. Weder di Mauro. 2021. “Revisiting the EU Framework: Economic Necessities and Legal Options.” CEPR Policy Insight No 114, Centre for Economic Policy Research, London. - Gaspar, V. 2020. “Future of Fiscal Rules in the Euro Area.” Workshop on Fiscal Rules in Europe: Design and Enforcement, Directorate-General for Economic and Financial Affairs, Brussels, January 28. - Gaspar, V. 2021. “The Future of the EU Fiscal Governance Framework.” Keynote Address at The Future of the EU Fiscal Governance Framework, virtual, November 9. - European Fiscal Board (EFB). 2019. Annual Report 2019. Brussels. - European Fiscal Board (EFB). 2020. Annual Report 2020. Brussels. - European Fiscal Board (EFB). 2021. Annual Report 2021. Brussels. - European Commission (EC). 2021. “Report on Public Finances in EMU 2020.” Institutional Paper 147. Brussels. - Government of the Netherlands. (April 4, 2022). Spain and The Netherlands Call for a Renewed EU Fiscal Framework Fit for Current and Future Challenges. ### Methodological and institutional analyses cited - Institutional design and compliance evidence - Hallerberg, M., R. Strauch, and J. von Hagen. 2007. “The Design of Fiscal Rules and Forms of Governance in European Union Countries.” European Journal of Political Economy 23 (2): 338–59. - Heinemann, F. 2006. “Planning or Propaganda? An Evaluation of Germany’s Medium-term Budgetary Planning.” FinanzArchiv/Public Finance Analysis 62 (4): 551–78. - von Hagen, J. 2010. “Sticking to Fiscal Plans: The Role of Institutions.” Public Choice 144 (3): 487–503. - Pench, L., S. Ciobanu, M. Zogala, and C. B. Manescu. 2019. “Beyond Fiscal Rules: How Domestic Fiscal Frameworks Can Contribute to Sound Fiscal Policy.” VoxEU CEPR, October 14. - Political economy, incentives, and market discipline - Kalan, F. D., A. Popescu, J. Reynaud, V. Haksar, and C. A. Pattillo. 2018. “Thou Shalt Not Breach: The Impact on Sovereign Spreads of Noncomplying with the EU Fiscal Rules.” IMF Working Paper, International Monetary Fund, Washington, DC. - Caselli, F., and P. Wingender. 2021. “Heterogeneous Effects of Fiscal Rules: The Maastricht Fiscal Criterion and the Counterfactual Distribution of Government Deficits.” European Economic Review 136 (C). - Pina, Á., and N. Venes. 2011. “The Political Economy of EDP Fiscal Forecasts: An Empirical Assessment.” European Journal of Political Economy 27 (3): 534–46. *Reforming the EU Fiscal Framework: Strengthening the Fiscal Rules and Institutions, DP/2022/014* --- _Source: https://www.imf.org/-/media/files/publications/dp/2022/english/reffsfriea.pdf_