Europe | Rethinking the fiscal rules

Since the beginning of the pandemic, the performance of the key economic indicators has been disrupted, particularly in terms of the sharp swings in activity and now the persistence of inflation. Policy priorities have also been strongly affected.

Key points

• Key points:
• The countercyclical role of fiscal policy was underscored and, in Europe, the rules were suspended and debt rose to record highs. The ongoing debate to reform the fiscal component of the Stability and Growth Pact (SGP) was postponed, but is now back on track.
• Perhaps the main cause lies in the complexity in the wake of successive reforms, in part because the fiscal rule depends on variables subject to debate, such as the structural deficit.
• It is also influenced by the procyclicality it generates (deficits and debt are not sufficiently reduced during expansions, requiring greater budgetary adjustments in periods of recession) and the lack of a fiscal union and the lack of institutions strong enough to enforce compliance, thus reducing the credibility of the rules.
• The European Commission has recently published its proposal for a new economic governance framework. The new element is that the path to debt reduction would no longer be the same for all countries, but negotiated bilaterally with each country, while the deficit limit would remain at 3% of GDP.
• Much remains to be discussed, but a simpler, expenditure-focused and more countercyclical rule will likely help countries comply more effectively.

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