Returning to a "new normal": Revising the EU fiscal rulebook

PB 02'2022 (2)

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Starting from the freshly published Policy Brief by the Bureau´s Chief Economist, participants discussed possible contours of a revised EU fiscal rulebook. Participants agreed that in view of revealed failures and shortcomings (procyclicality, complexity, asymmetry, and an inherent bias towards austerity were mentioned amongst others), and against the background of a radically changed economic environment (higher public debt ratios due to the pandemic, yet low or even negative interest rates), simply reinstating the "old rules" in 2023 would imply an overly large upfront reduction in debt ratios entailing high social and economic costs. Raising the target value for public debt ratios and /or reducing the required pace of debt reduction, perhaps in a country-specific modulation, were considered as possible variants. Participants also agreed on the need for simplification of the rules and the strong reliance on unobservable indicators such as the annual output gap, which tends to be frequently revised, was found to be both impractical and untransparent. Many participants supported the idea of using a medium-term expenditure rule as the basis for measuring compliance. However, views differed about introducing some form of "(green) golden rule" exempting certain categories of public spending. Proponents referred to the huge amount of public investment needed to achieve the green and digital transformation, while others feared that this would open the floodgates of renewed fiscal profligacy at the national level resurrecting the old battle lines between fiscal hawks and fiscal doves. Participants welcomed the idea to incentivise the double transition towards green and digital by remodelling the Recovery and Resilience Facility once it expires as a permanent fiscal capacity to support and stabilise broad categories of public investment in EU member states. Addendum: In this context, some were concerned that possible errors and misallocation of funds in the deployment of the RRF could discredit common debt issuance at the EU level in the future.