Reforming the EU fiscal framework: Now is the time by Niels Thygesen, Roel Beetsma, Massimo Bordignon, Xavier Debrun, Mateusz Szczurek, Martin Larch, Matthias Busse, Mateja Gabrijelcic, Eloïse Orseau, Stefano Santacroce published by VOXEU (10/2020)
“This year’s annual report of the European Fiscal Board provides new evidence that the EU fiscal framework does not deliver the goods. This column argues that it should be reformed without delay. As forging consensus among EU member states takes time, the activation of the general escape clause until end-2021 offers a window of opportunity to build a simpler, leaner and more effective fiscal contract. The year 2019 illustrated once again how EU member states largely failed to build buffers in good times, those very buffers that would have been welcome in the face of the Covid-19 shock. In 2019, and despite sustained economic growth, the aggregate EU government deficit has increased for the first time since 2011 while cases of non-compliance with the preventive arm of the Stability and Growth Pact (SGP). Like other common shocks before, the pandemic has exposed three long-standing gaps in EMU’s architecture: (1) the lack of a genuine and permanent central fiscal capacity; (2) adverse incentives to maintain or scale up growth-enhancing government expenditure; (3) an intractable set of rules and benchmarks poorly tailored to country-specific debt reduction needs and capacities.
On 20 October 2020, the European Fiscal Board published its new annual report. The report provides a careful assessment of 2019 and puts forward ideas on how to strengthen the EU fiscal framework. The year 2019 marked the end of a six-year long recovery from the financial and sovereign debt crises. Although slowing, economic growth settled at around 1.5%, in line with its estimated potential. Overall, last year still qualifies as good economic times, with the level of economic activity at or above potential in the vast majority of EU countries. Despite sustained economic growth, the aggregate fiscal position of both the euro area and the EU weakened by around 0.25% of GDP as measured by the structural primary budget balance (Figure 1). The deterioration of public finances largely resulted from expenditure slippages, which more than offset savings on interest payments…”
