maritime transport

Strengthening fiscal rules and institutions

Reforming the EU fiscal framework: strengthening fiscal rules and institutions

Author/Editor:

Nathaniel G Arnold; Ravi Balakrishnan; Bergljot B Barkbu; Hamid R Davoodi; Andresa Lagerborg; Waikei R Lam; Paulo A Medas; Julia Oten; Louise Rabier; Christiane Röhler; Asghar Shamoradi; Mariano Spector; Sebastien Weber; Jerome Zettelmeyer



Publication date:

September 5, 2022

Electronic access:

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Disclaimer: The opinions expressed herein are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.


Summary:

The EU budgetary framework must be reformed. Although the existing budgetary rules have had some impact on limiting deficits, they have not prevented the deficits and debt ratios which have threatened the stability of the monetary union in the past and which continue to create vulnerabilities today. The framework also has a poor track record of managing the trade-offs between containing fiscal risks and stabilizing output. Finally, the framework does not provide sufficient tools for stabilization at EU level. This was most visible in the decade following the eurozone sovereign debt crisis, when structurally low real interest rates strained the policy tools of the European Central Bank (ECB). , leading to a persistent underestimation of its inflation target. This document proposes a new framework based on risk-based fiscal rules at EU level, strengthened national institutions and central fiscal capacity. First, risk-based fiscal rules at EU level would link the speed and ambition of fiscal consolidation to the level and horizon of fiscal risks, as identified by the sustainability analysis of the debt (AVD) using a common methodology developed by a new independent European Fiscal Council (EFC). The 3% deficit and 60% debt reference values ​​would be maintained. Second, all member countries would be required to adopt medium-term budgetary frameworks in line with EU-level rules, i.e. to ensure medium-term convergence towards an overall balanced budget by setting spending limits. Independent National Fiscal Councils (NFCs) would have a much greater role in strengthening checks and balances at the national level (including making or approving macroeconomic projections and conducting DSAs to assess fiscal risks). The European Commission (EC) would continue to play its key oversight role as set out in the Maastricht Treaty and the EFC would be the center of a peer network of fiscal councils. Third, building on the recent experience with the NextGenerationEU (NGEU), a fiscal capacity of the EU (FCEU) would improve the macroeconomic stabilization of the euro area and enable the provision of common EU public goods – a task which has become more urgent given the green transition and the common policy. security concerns. At the heart of the proposal is a mutually reinforcing relationship between EU rules and implementation at national level. Strengthening implementation requires both better national ownership of the rules and their application and greater alignment of national frameworks with European rules. The first can only be achieved through rules that convincingly balance member needs while avoiding negative externalities between members. This argues for a risk-based approach, the first pillar of our proposal. The latter necessitates a greater role for significantly improved national frameworks – the second pillar of our proposal.