European Fiscal Board chief: Commission’s analysis ‘made a bit too quickly’

Niels Thygesen was an independent member of the Delors Committee on Economic and Monetary Union in 1988 and 1989. [EABH/Flickr]

The new European Fiscal Board began working just as the European Commission took the unprecedented step of proposing a fiscal target for the eurozone. The Board’s chief, Niels Thygesen told that the Commission should have done “more analysis” before proposing an expansionist stance.

Niels Thygesen is the chair of the European Fiscal Board. He is a Danish economist and professor emeritus of International Economics at the University of Copenhagen. In his long career in academia and advisory role for governments and international institutions, Thygesen was an independent member of the Delors Committee, which prepared the outline for the Economic and Monetary Union in 1988-1989.

Thygesen spoke with’s Jorge Valero in his first interview since the European Fiscal Board became active. 

How is the process of setting up the Board progressing?

We were established in the second half of October. We had our first two meetings in November. We have a small secretariat of five economists, the head of secretariat and four other economists. We rely heavily on the interaction with the Directorate-General for Economic and Financial Affairs (ECFIN). We don’t depend on them for our opinions, of course. But for the more technical work, we do need to have a close working relationship with them.

You are embedded in the Commission’s Secretariat General, and you depend very much on the Commission’s technical expertise. Is your independence affected?

It is too early to say. But I have been assured that it would not be the case, and I have some confidence about that. In DG ECFIN they also welcome having this independent assessment of some of the work they are doing from time to time. But we need to rely on the empirical work they do. They have 500 economists, we have five. So it is an unbalanced situation. But of course, it is the same situation that other national fiscal councils face. They have to rely on ministries of finance to do some of the detailed calculations. That does not prevent them from having an independent opinion.

Ideally, would you prefer a more independent structure?

I am not sure. Part of our mandate is so technical that we need to be in close touch with the people who actually produce the figures. The practical advantages outweigh the potential risk of perceptions of lack of independence. I am not sure we would have preferred that. Besides, we would get in trouble if academia, the press or the financial sector suspect that we are too close to the Commission staff.

You attended the Eurogroup for the first time last Monday (5 December). One of the key topics was the Commission’s proposal for a positive fiscal stance of 0.5% of GDP for the Eurozone as a whole. Do you agree with the executive’s assessment?

The concept of a fiscal stance for the euro area is a welcomed one. It is also part of our mandate. We welcome the discussion. But we are not ready to endorse a particular number or stance. The Commission proposed 0.5%. That was surprising. We did not give an outright opinion on that but we noted that there is a need for a more careful analysis of the overall fiscal stance. Not only on the basis of the output gap, which has been a very difficult concept to use in the past. One needs to look at other indicators, such as the extremely low inflation rate, the excess of savings or level of investments. The concept deserves more discussion and more analysis. We have not done the analysis yet, but we would like to be engaged in it and to contribute to it. So we approve the concept but we hesitate about the number that was used. This was not far from what was said by other members in the Eurogroup.

Even if the Commission now claims that it is not pushing for a specific target, its message was pretty clear when the institution defended a shift from a neutral to an expansionist stance. Regardless of the specific number, are you saying that the Commission should not have jumped to that conclusion that fast?

I think it would be more convincing to do more analysis; it is possible that will strengthen the Commission’s opinion. The arguments were a little bit too quickly made in this round.

After you attended the Eurogroup, the European Parliament has become anxious about having a meeting with you. When will it happen?

They wrote us immediately after we were nominated, but we were not ready to be called for a full meeting with the Committee on Economic and Monetary Affairs, maybe the chairman and some of his colleagues of other political parties. That may take place via teleconference. I am aware that is a contact we need to develop. No date has been set for that. It depends on the Parliament’s schedule as well. We have other requests as well from official bodies like the Court of Auditors. We are trying to be as open as we can. We are anxious to spread our message, but first we need to have a bit more of a message before we can do that in full confidence.

Later in Spring, we will be heavily occupied with what is, in essence, the main part of our mandate: to assess whether the current rules are applied in a fair and consistent way across countries and over time. That is not a small task because the rules have become so complicated that it takes some time to get an overview of that.

Do you believe that the recent pardons extended to Spain and Portugal jeopardise the Stability and Growth Pact, as some argue?

I don’t think that is true. I was a bit impressed, I must say, when I observed in the Eurogroup that countries take the Stability and Growth Pact seriously also when it is inconvenient to them. They discuss it very carefully and they don’t object to strong critical objections to their own policies. I don’t think we should underrate the force of these rules, even when they are not followed up by sanctions.

Is the Stability and Growth Pact fairly applied?

I cannot judge that yet. It is very complicated. I know some of the most recent cases but…

France has been always a controversial case…

Yes, France is controversial. We will certainly look carefully at France. Of course, there has been, in the past, examples of countries being treated a bit in proportion to their power in the whole group. But the idea was that should be in line with the structural analysis. So it is an important issue to see if that has been the case. It is also part of the mandate to assess whether the rules have become too complicated. There are some loopholes and quite a lot of discretion in the way the rules are applied already. It is therefore even harder to see precisely how this discretion has been used. That is a task that we will follow up but that requires two or three months of hard work from our part.

If you see a significant discrepancy between your assessment and the Commission’s view on a member state’s fiscal situation or a national budget, would you issue a warning?

That is possible.

In the past, you were a strong advocate of market discipline. In light of market turbulence during the euro crisis, described as ‘wolf pack’ behaviour, do you think that market discipline is still valid?

The idea of the Stability and Growth Pact was, in my view, to give markets a bit more of information or orientation on how to look at member states. But in fact, markets did not take much notice. In early 2000 maybe the imbalances did not look too large, and they assumed there would always be solidarity in some sense between countries. But sometimes markets went overboard as they did in 2011/2012, with Spain and Italy as prime examples. It was considered markets went too far. Then the European Central Bank intervened with the Outright Monetary Transactions.  But then markets became too much calm and spreads disappeared again.

We have not solved the underlying problem of market discipline. It does have a role to play. It may come back again now that we have some tensions coming either from the US or the gradual recovery of Europe. We must learn to do better than that, just not to be happy when there are not spreads at all, and to be completely unhappy when spreads rise. But clearly, there must be some sort of upper limits to what markets can do to countries. In some sense, they must be guided or better informed.

The European Fiscal Board will provide the European Commission with an evaluation of the implementation of the EU fiscal rules, including the appropriateness of the actual fiscal stance at euro area and national levels.

The Commission appointed Thygesen, who will lead a team of four economists. They are Roel Beetsma, from The Netherlands, the Italian economist Massimo Bordignon, Sandrine Duchêne, former advisor to French President Francois Hollande, and the former Finance Minister of Poland, Mateusz Szczurek.

The Board will publish an annual report of its activities, which will include summaries of its advice and evaluations rendered to the Commission.

A Memorandum of Understanding will be signed between the Board and relevant Commission services, the executive explained. The document will address budgetary and human resources, as well as access to data and information necessary for the board to carry out its tasks.

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