The European Fiscal Board supported on Wednesday (16 June) maintaining the suspension of the Stability and Growth Pact throughout next year but called for reinstalling a revised set of fiscal rules from 2023 to minimise risks.
The chair of the European Fiscal Board, Niels Thygesen, recalled that the body already said the activation of the Stability and Growth Pact’s escape clause should be subject to a clear sunset provision: the return of the eurozone GDP to its pre-crisis level.
“As this criterion may only be met in 2022, we support the recent decision for the clause to remain active next year,” he told reporters.
The Board, however, considered that it is important to reinstall the framework as of 2023 because having the escape clause without a sunset clause could be undesirable and “dangerous”, Thygesen said.
But the institution seemed to align with those who advocate the reactivation of the rules once the deficit and debt thresholds have been reviewed.
“Returning to a revised rules-based fiscal framework is a matter of urgency to cement credibility and mitigate uncertainty about future policies,” Thygesen added.
The European Fiscal Broad proposed in September 2019 a set of measures to better adjust the Stability and Growth Pact – a set of fiscal rules for EU countries – to the reality of the different national economies, especially with regard to public debt reduction.
Instead of a 3% deficit level and unobservable indicators, it proposed an annual expenditure ceiling and a growth-friendly orientation to support productive investment, especially in ‘green’ priorities.
Its recommendations came before the Commission launched the review of the Stability and Growth Pact in February 2020. The review has been suspended until now because the EU focused on putting forward the emergency measures to address the COVID-19 crisis, but the process will be relaunched in the second half of this year.
Following the steps of the Commission and the International Monetary Fund, the Board warned against an early withdrawal of the stimulus. But it considered that no further extraordinary measures are needed at the EU level to cement European recovery.
Instead, in its recommendation for the eurozone fiscal stance for next year, the European Fiscal Board recommended gradually phasing out emergency measures, while keeping expenditure above pre-crisis levels.
To that end, the priority over the next couple of years will be shifting the existing COVID-related expenditure towards more targeted initiatives to support the recovery and achieving the green and digital transitions, the Board said.
“The EU should aim to strike a proper balance between a growth-friendly expenditure strategy and longer-term fiscal sustainability, currently stretched in a number of member states, despite exceptional monetary accommodation and very low debt-servicing costs,” Thygesen said.
For those countries with high debt levels, the Board recommended using the recovery fund to finance additional investment and protect the sustainability of their public finances.
[Edited by Zoran Radosavljevic]