{
  "title": "European Fiscal Governance: A Proposal from the IMF",
  "publication": "IMF Blog, September 5, 2022",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2022/09/05/european-fiscal-governance-a-proposal-from-the-imf",
  "canonical": "https://www.imf.org/en/blogs/articles/2022/09/05/european-fiscal-governance-a-proposal-from-the-imf",
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  "summary": "High debt and rising interest rates put a premium on improved governance to anchor fiscal policy in EU member states.",
  "sections": [
    {
      "heading": "Context and rationale",
      "content": "- High debt and rising interest rates increase the premium on improved governance to anchor fiscal policy in EU member states.\n- Fiscal policy is essential for supporting households and firms after large shocks (for example, the pandemic) and when monetary policy is constrained.\n- The EU needs revamped fiscal rules that:\n  - have flexibility for bold and swift policies when needed, and\n  - do not endanger the sustainability of public finances.\n- Building greater fiscal buffers in normal times is critical to avoid debt crises that could destabilize the monetary union and put the EU at risk.\n- The general escape clause was triggered in March 2020, enabling temporary deviation from EU fiscal rules; its extension through 2023 provides a window for reform."
    },
    {
      "heading": "Diagnosis: shortcomings of the existing framework",
      "content": "- The existing rules increased public awareness that fiscal deficits should be below 3 percent of gross domestic product, improving government accountability on deficits.\n- Despite refinements, the framework has not prevented an undesirable buildup of public debt and fiscal sustainability risks among some members; many countries now have debt levels above the Maastricht Treaty reference value of 60 percent of GDP.\n- Contributing factors:\n  - Weak national institutions and political pressures.\n  - Large negative shocks.\n  - Design limitations of the framework—ceilings on deficits in bad times without sufficient incentives to build buffers in good times.\n  - Poor performance at stabilizing output and lack of tools to provide common public goods for member countries."
    },
    {
      "heading": "The IMF proposal: three interconnected pillars",
      "content": "- Risk-based EU-level fiscal rules\n  - The 3 percent deficit and 60 percent debt reference values remain.\n  - The speed and ambition of fiscal adjustments would be linked to the degree of fiscal risks, identified by debt sustainability analysis using a common methodology.\n  - A new and independent European Fiscal Council (EFC) would develop the methodology in consultation with other stakeholders.\n  - Countries with greater fiscal risks would need to converge to a zero or positive overall fiscal balance over the next three to five years.\n  - Countries with lower fiscal risks and debt below 60 percent would have more flexibility but still must consider risks in their plans.\n  - The framework would incentivize buildup of fiscal buffers and allow significant flexibility to respond to adverse shocks and conduct countercyclical policy.\n- Strengthened national fiscal institutions\n  - All EU countries would enact medium-term fiscal frameworks and set multi-year annual spending caps consistent with their overall balance anchor over the period.\n  - Independent national fiscal councils would play a stronger role, including:\n    - making or endorsing macroeconomic projections,\n    - assessing fiscal risks, and\n    - ensuring consistency of expenditure ceilings and fiscal plans.\n  - The European Commission would continue key surveillance responsibilities.\n  - The EFC would serve as the central node for a network of national fiscal councils, promote good practices, and provide an independent voice on debt risks and framework execution.\n- A well-designed EU fiscal capacity\n  - Would serve two key roles:\n    - improving macroeconomic stabilization, especially when monetary policy is operating at the effective lower bound, and\n    - allowing provision of common public goods at the EU level, such as climate change and energy security infrastructure.\n  - A dedicated climate investment fund is an important part of the proposal.\n  - Delivering these roles is urgent due to the green transition and common security concerns."
    },
    {
      "heading": "Implementation and political economy",
      "content": "- The proposal is a package of interlinked elements requiring:\n  - a mutually reinforcing relationship between EU rules and national implementation,\n  - greater domestic ownership of the rules, and\n  - better alignment between country frameworks and EU rules.\n- The risk-based approach balances member countries’ needs with safeguarding them from negative spillovers; stronger national frameworks and enhanced independent fiscal institutions are necessary to achieve this balance."
    },
    {
      "heading": "Policy urgency and timing",
      "content": "- Amid extraordinary economic uncertainty and fiscal challenges, reform cannot wait.\n- The extension of the general escape clause through 2023 provides a window of opportunity; further delays would force countries to revert to the old rules with their existing problems.\n\nVitor Gaspar, Alfred Kammer, Ceyla Pazarbasioglu, September 5, 2022 — European Fiscal Governance: A Proposal from the IMF\n\n---\n\n\n References\n\n- new IMF paper\n\nSource: https://www.imf.org/en/blogs/articles/2022/09/05/european-fiscal-governance-a-proposal-from-the-imf"
    }
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    "Authors: Vitor Gaspar, Alfred Kammer, Ceyla Pazarbasioglu",
    "Published: September 5, 2022",
    "High debt and rising interest rates increase the premium on improved governance to anchor fiscal policy in EU member states.",
    "Fiscal policy is essential for supporting households and firms after large shocks (for example, the pandemic) and when monetary policy is constrained.",
    "The EU needs revamped fiscal rules that:",
    "Building greater fiscal buffers in normal times is critical to avoid debt crises that could destabilize the monetary union and put the EU at risk.",
    "The general escape clause was triggered in March 2020, enabling temporary deviation from EU fiscal rules; its extension through 2023 provides a window for reform.",
    "The existing rules increased public awareness that fiscal deficits should be below 3 percent of gross domestic product, improving government accountability on deficits.",
    "Despite refinements, the framework has not prevented an undesirable buildup of public debt and fiscal sustainability risks among some members; many countries now have debt levels above the Maastricht Treaty reference value of 60 percent of GDP.",
    "Contributing factors:",
    "Risk-based EU-level fiscal rules",
    "Strengthened national fiscal institutions",
    "A well-designed EU fiscal capacity",
    "The proposal is a package of interlinked elements requiring:",
    "The risk-based approach balances member countries’ needs with safeguarding them from negative spillovers; stronger national frameworks and enhanced independent fiscal institutions are necessary to achieve this balance.",
    "Amid extraordinary economic uncertainty and fiscal challenges, reform cannot wait.",
    "The extension of the general escape clause through 2023 provides a window of opportunity; further delays would force countries to revert to the old rules with their existing problems.",
    "[new IMF paper](https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2022/08/31/Reforming-the-EU-Fiscal-Framework-Strengthening-the-Fiscal-Rules-and-Institutions-The-EUs-518388)"
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