Whither EU Fiscal Rulemaking?
Since fiscal discipline is essential for euro stability, any new governance framework must minimize the risk of cross-border negative spillovers, discourage free riding, and address moral hazard. Unfortunately, the European Commission’s new proposals fall far short of advancing any of these goals.
BRUSSELS – On November 9, 2022, the European Commission published a blueprint for reforming the European Union’s economic-governance framework. Among other things, the document envisions a more integrated approach to EU economic surveillance, strengthened national ownership, simplified rules for governing fiscal risks, and better enforcement of those rules. But the details of the proposal raise doubts about the feasibility of achieving these goals. Specifically, the fiscal component of the proposed framework leaves three fundamental questions unanswered.
The first question is whether the new rules would prevent sovereign insolvency. As of 2021, seven eurozone countries had general government gross debt exceeding 100% of GDP, which means that it is only a matter of time before financial markets become nervous about some countries’ debt sustainability. But the Commission’s proposed method of dealing with excessive debt is even more lenient than the old one under the Stability and Growth Pact (SGP).
The blueprint rejects the previous “1/20th rule” for debt reduction on the grounds that requiring governments to cut their debt each year by 1/20th of the excess above 60% of GDP is too demanding. Instead, the Commission wants member states with “substantial” or “moderate” debt challenges to negotiate a medium-term fiscal plan that will include a downward debt trajectory. The document neither elaborates on the speed of the fiscal adjustment – that will be detailed later in the methodology for debt sustainability analysis (DSA) – nor specifies the criteria for categorizing debt challenges as “substantial,” “moderate,” or “low.”
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