The seven-point recipe to improve EU’s messy fiscal rules

Outgoing commissioner for Economic Affairs, Pierre Moscovici, during a press conference last year. [European Commission]

The European Fiscal Board has recommended major reform of the Stability and Growth Pact in order to simplify the EU’s spending rules and favour productive investment in the era of low-interest rates.

The eurozone’s fiscal stability authority published on Wednesday (11 September) a report assessing the implementation of the deficit and debt rules, in particular, the new legislation introduced in the midst of the economic crisis to better control the national budgets.

The report was commissioned by the European Commission in January. The chair of the board, Niels Thygesen, presented the conclusions to the college on Wednesday.

EU finance ministers will discuss a review of the fiscal rules this weekend during the informal Ecofin in Helsinki (Finland).

A diplomat said that reaching an agreement to amend the legal framework would be “very difficult” given the divisions among the member states.

European Fiscal Board calls for simple but tougher rules

The European Fiscal Board, the EU’s finance watchdog, wants clearer rules and real sanctions to punish profligate member states and limit the European Commission’s discretion to interpret the Stability and Growth Pact.

In line with past documents, the EU fiscal board concluded that the rules urgently need to be simplified, and criticised the fact that the Commission relies on “unobservable indicators” and real-time data.

“The growing complexity of the functioning of the stability and growth pact has become problematic, raising questions about transparency, equal treatment among countries, and communicability to the public,” the report reads.

The fiscal authority also complained that the flexibility granted in the past to national economies to increase spending “was often badly timed”, failing to support public investment and was made based on political considerations.

Italy was the main beneficiary of this additional leeway given by the EU executive over the past years. As a result, Rome may face a new sanctions procedure while the Italian economy remains stagnant.

A new team to defend Europe's economic sovereignty

Achieving a “more assertive” Europe that can improve its competitiveness and sovereignty in an increasingly hostile world. These are the main guidelines of President-elect Ursula von der Leyen to the new College of Commissioners, unveiled on Tuesday (10 September).

If confirmed by the European Parliament, former Italian prime minister, Paolo Gentiloni, would be precisely the man responsible for reviewing the fiscal rules, to achieve “a more growth-friendly fiscal stance in the euro area and stimulate investment, while safeguarding fiscal responsibility,” Commission president-elect Ursula von der Leyen wrote in her mission letter to Gentiloni.

On this note, the European Fiscal Board detailed further how he should pursue the stability and growth pact reform, in particular, to support investment in the region.

“More attention to stimulating growth-enhancing spending is warranted by the likely persistence of a low-interest-rate environment as well as by the increasingly specific nature of EU investment initiatives,” Thygesen wrote in the report.

New targets: The fiscal board already made a proposal last year to get rid of the deficit rule and instead rely on a simpler medium-term debt ceiling and a ceiling on the net primary expenditure growth for a period of three years. It would add an escape clause triggered on the basis of independent economic judgment.

Golden rule for public investment: Member States could voluntarily top-up expenditures on EU projects co-financed by them beyond their national commitments. These could then be deducted from the calculation of the net primary expenditures.

EU Fiscal Board blames Commission for ineffective recommendations

The European Fiscal Board complained on Wednesday (10 October) that member states had failed to use strong economic growth to reduce their public debt, and called for a major change of EU fiscal rules to ensure better enforcement by the European Commission.

Eurogroup full-time president: The informal body is key to govern the eurozone fiscal stance and police the national budgets. It could be improved if it is chaired by a full-time president, who is neither a national finance minister nor a member of the Commission.

Abolish reverse qualified majority voting: This system is used for most sanctions under the fiscal rules. Sanctions are imposed unless a qualified majority of member states overturns them. The fiscal board considered that the introduction of the RQMV contributed to “the politicisation of the Commission and the bilateralisation of fiscal surveillance at the expense of multilateral peer review.”

Independent DG ECFIN: the Board recommended that the experts of the Commission’s directorate-general for Economic and Financial Affairs play “a more independent role”. They are responsible for setting the fiscal targets and assessing whether the member states meet those goals. In some cases, the political decision deviates from the technical assessment made by their experts.

Better sanctions: the EU fiscal board noted that the financial sanctions introduced during the crisis in case of breaching the rules have been politically difficult to enforce. Spain and Portugal were the first countries found not to be in compliance with the Stability and Growth Pact, but fines were not enforced.

The board wants to use the eurozone’s fiscal capacity, the anti-shock tool still under discussion, as a carrot. To that end, access to the fund will depend on compliance with the spending rules.

EU fiscal board insists on stabilisation mechanism

Any systemic shock will not affect just some countries but the whole euro area so if member states want to counter it adequately, they need to have a central fiscal capacity, European Fiscal Board (EFB) president Niels Thygesen told reporters on Tuesday (25 June). 

Sustainability: the report noted that the design of the fiscal rules forced countries to adjust their economies in bad times, while it disregarded the sustainability of high-debt countries. For that reason, the board recommended a seven-year cycle mirroring the multiannual financial framework (MFF), the EU’s long-term budget, to better coordinate their public accounts, and especially investment.

“High-debt countries would commit to reducing their debt, and symmetrically low-debt countries would commit to increasing growth-enhancing government expenditure, in particular those that have positive cross-border spillovers,” the document said.

Europeans tell Germany to spend more to boost euro economy

European ministers and institutions told Germany on Monday (8 July) to increase public spending in order to support the ailing growth in the eurozone, as decision-makers and investors see a growing risk of recession looming on the horizon.

[Edited by Zoran Radosavljevic]

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