BRUSSELS – The fiscal rules of the European Union have undergone some much-needed improvements in recent years, but much more needs to be done. In addition to suffering from a lack of clarity on key issues, EU fiscal policy remains overly focused on short-term goals, reflected in its needless emphasis on nominal deficit targets within annual budget cycles.
To be sure, all EU countries have a real interest in the fiscal sustainability of their fellow members. But annual deficits are poor approximations of the likelihood that one member may have to repay another’s debt. The fact that the existence of exceptional circumstances can now be invoked to distribute the burden of any needed adjustments over more than one year is helpful. But it does not eliminate the short-term bias embedded in the EU’s fiscal rules.
In a fully integrated market, the annual financing of government deficits should not be an issue, provided the stock of debt is sustainable. That is why the EU should strive to create a fiscal framework that has the sole objective of ensuring that its members’ debts are sustainable. By definition, this target would be country-specific. It would not require a headline deficit of below 3% of GDP in each and every year, in each and every country. But it would require a more sophisticated analytical framework than the current one, which merely distinguishes between countries on the basis of whether they meet the EU’s 60%-of-GDP ceiling on public debt.
The eurozone is much better positioned to manage fiscal pressures than it once was. The European Central Bank’s “outright monetary transactions” scheme provides an important backstop for debt sustainability. And a banking union, once completed, should contain the risk of financial crisis and contagion. Meanwhile, quantitative easing by the ECB has reduced fears that governments will run out of cash, at least for the time being.