Reforming the EU Fiscal Framework: Strengthening the Fiscal Rules and Institutions
Departmental Papers, September 5, 2022
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- Reforming the EU Fiscal Framework: Strengthening the Fiscal Rules and Institutions
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Bibliographic details
- Authors: Nathaniel G Arnold, Ravi Balakrishnan, Bergljot B Barkbu, Hamid R Davoodi, Waikei R Lam, Paulo A Medas, Julia Otten, Louise Rabier, Christiane Roehler, Asghar Shahmoradi, Mariano Spector, Sebastian Weber, Jeromin Zettelmeyer
- Published: September 5, 2022
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9798400209888.087
Rationale and diagnosis
- Existing fiscal rules have had some impact in constraining deficits but "did not prevent deficits and debt ratios that have threatened the stability of the monetary union in the past and that continue to create vulnerabilities today."
- The framework has a poor track record at managing trade-offs between containing fiscal risks and stabilizing output.
- The framework lacks sufficient tools for EU-wide stabilization; most visible in 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), leading to a persistent undershooting of its inflation target."
Core proposal: three mutually reinforcing pillars
- Pillar 1 — Risk-based EU-level fiscal rules:
- Link the speed and ambition of fiscal consolidation to the level and horizon of fiscal risks as identified by debt sustainability analysis (DSA).
- DSA would use a common methodology developed by a new and independent European Fiscal Council (EFC).
- The 3 percent deficit and 60 percent debt reference values would remain.
- Pillar 2 — Strengthened national institutions and frameworks:
- Require all member countries to enact medium-term fiscal frameworks consistent with the EU-level rules.
- Ensure convergence over the medium-term to an overall fiscal balance anchor by setting expenditure ceilings.
- Independent national fiscal councils (NFCs) would have a much stronger role, including:
- Undertaking or endorsing macroeconomic projections.
- Performing DSAs to assess fiscal risks.
- The European Commission (EC) would continue to play its key surveillance role as articulated in the Maastricht Treaty.
- The EFC would serve as the center of a peer network of fiscal councils.
- Pillar 3 — Central fiscal capacity (FCEU):
- Build on the recent experience with the NextGenerationEU (NGEU).
- Improve euro area macroeconomic stabilization.
- Allow the provision of common EU public goods, an increasingly urgent task given the green transition and common security concerns.
Implementation logic and institutional relationships
- Central to the proposal is a mutually reinforcing relationship between EU rules and national-level implementation.
- Strengthening implementation requires:
- Better national ownership of the rules and their application.
- Greater congruence of national-level frameworks with EU-level rules.
- Rules must convincingly balance member needs with avoidance of negative externalities across members—this motivates the risk-based approach (first pillar).
- Achieving congruence requires a stronger role for significantly upgraded national-level frameworks (second pillar).
Key analytical and policy takeaways
- Maintain the 3 percent deficit and 60 percent debt reference values while shifting to a risk-based approach to determine consolidation speed and ambition.
- Institutional upgrades: establish an independent European Fiscal Council (EFC) to develop common DSA methodology and coordinate a peer network of fiscal councils; strengthen independent national fiscal councils (NFCs) to perform or endorse macro projections and DSAs.
- Create an EU fiscal capacity (FCEU) to bolster euro area stabilization and finance common public goods, leveraging lessons from NGEU.
- Emphasize expenditure ceilings and an overall fiscal balance anchor in national medium-term frameworks to ensure convergence and enforceability.
Source: Reforming the EU Fiscal Framework: Strengthening the Fiscal Rules and Institutions, Departmental Papers (2022), authors: Nathaniel G Arnold, Ravi Balakrishnan, Bergljot B Barkbu, Hamid R Davoodi, Waikei Raphael Lam, Paulo A Medas, Julia Otten, Louise Rabier, Christiane Roehler, Asghar Shahmoradi, Mariano Spector, Sebastian Weber, Jeromin Zettelmeyer; September 5, 2022.
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