Fiscal Rules in the European Monetary Union

Proposition 1: The existing fiscal rules for European Monetary Union members require revision.

Question 2: Which of the following is the one reform you would choose to improve fiscal rules?

Summary

The CfM-CEPR panel of experts on the European economy are nearly unanimous that existing EU rules require revision. Many panel members would opt for some package of fiscal councils; more flexible, countercyclical, or expenditure-based rules; and increased fiscal capacity at the EU level. A smaller share of panelists would scrap fiscal rules altogether, leave fiscal policy to national authorities, and provide greater clarity that the EU wouldn’t bail out countries facing debt problems. A single member called for stricter rules with greater enforcement.

Background

The May 2021 CfM-CEPR survey asked the members of its European panel of experts whether EU fiscal rule require revision and for alternative proposals to the existing framework. 

Fiscal Rules in the EU

Fiscal rules were enshrined in the founding documents of the European Monetary Union. The Maastricht treaty of 1992 required that members, existing and prospective, keep public debt below 60%, and public deficits below 3% of GDP. The Stability and Growth Pact (SGP), enacted in 1997, further elaborated these rules and their enforcement mechanisms. These were viewed essential to avoid mutualization of sovereign liabilities and the potential spillovers from a sovereign debt crisis to the banking system and potentially the independence of the European Central Bank (cf. Eichengreen and Wyplosz 1998). fiscal While the SGP allowed an escape clause for large recessions, the criteria came under immediate criticism for imposing procyclical policies on member states, forcing them to cut deficits during recessions.

Debates heightened during the global financial crisis and the accompanying Eurozone crisis. During the crisis, member countries’ fiscal policies were constrained by conditionality under European and IMF lending programmes (e.g. Greece) the SGP (e.g. France and Italy), and national fiscal rules (e.g. Germany). Some blamed the SGP for imposing austerity policies on member states already experiencing a dire downturn. Others viewed the SGP—or some form of fiscal rule—as a safeguard against moral hazard, critical to avoid bailouts, and prerequisites for a monetary union (Wolfgang Schäuble has been a vociferous proponent of this view, recently in this editorial).  Brunnermeier, James, and Landau (2016) review the two sides of the debate and its historical origins.

The years following the crisis led to some rethinking of fiscal rules. The most recent formal change was a European parliament communication in 2015 that allowed escape clauses conditional on the magnitude of recession a country faced, but clarifies that it only elaborates on the escape clause already set out in the SGP rather than a change in the fiscal rules. An earlier reform of the SGP in the mid-2000s, following infringements by Germany and France, made the rules more countercyclical but was deemed unenforceable because it set targets for the (unobserved) structural fiscal balance. There is a heated debate on reforming the EU’s fiscal framework, see for example the discussion in the European Fiscal Board’s August 2019 report and the Economic Governance Review of the DG-ECFIN in February 2020.

Beetsma et al (2018) argue that the patchwork of rules and exceptions, resulting from the political compromises of the past two decades, have made the fiscal framework confusing, subjective, and arbitrary in its enforcement. The complexity of the fiscal rule is perhaps best illustrated through the European Commission’s Vade Mecum (Handbook) on the SGP, meant to “Enhanc[e] the clarity of the strengthened fiscal (and economic) governance toolbox,” but running over 100 pages. Moncelli, and Perotti (2021) give an excellent overview of the myriad debates regarding fiscal policy in the EU. Baldwin and Giavazzi (2016) collect a broad range of proposals to improve the current institutional arrangements governing the Eurozone.

The crisis also led to new institutional arrangements, including the European Stability Mechanism, which is authorized to lend to Eurozone countries facing funding difficulties. It also led to enhanced surveillance under the 6-pack and 2-pack EU legislative packages of 2011, which introduced independent national fiscal councils. The Covid-19 crisis triggered the SGP’s escape clause and led to further innovations. These include €672.5 billion in assistance through the NextGenerationEU’s Recovery and Resilience Facility, including loan and grant assistance, financed in part by borrowing at the EU level.

There have been many suggestions to reform European fiscal rules. At one end of the spectrum are calls to scrap fiscal rules and replaces them with norms, enforced by fiscal institutions. Some non-Eurozone countries, including the UK and Sweden, have soft fiscal rules, complemented with councils that provide objective analysis on how well the government is meeting its targets. Blanchard, Leandro, and Zettelmeyer’s (2021) proposal can perhaps be viewed in this light. They suggest replacing fiscal rules with looser “fiscal standards” that would be enforced by an apolitical body. In the authors’ view, fiscal rules are insufficiently supple for national fiscal policies to respond to frequent unforeseen circumstances. Chadha, Küçük and Pabst also argue for fiscal norms enforced by a beefed up fiscal council for the UK.

Some commentators have called to revise and loosen the fiscal rules. Beestma et al (2018) propose member countries provide a 15-year plan to meet the 60% debt to GDP ratio and effectively making the deficit target secondary (a European Parliament paper makes a similar proposal). Bénassy-Quéré et al (2018) is a policy paper of fourteen prominent economists, including seven French and seven German independent economists (the so called 7+7), reflecting a variety of views. (See also the press release here.) They suggest several changes including allowing for debt restructuring, expanding fiscal capacity at the federal level, and reforming fiscal rules. According to their proposal, existing rules should be replaced with a ceiling on spending growth in line with potential output growth, with a correction factor to reduce the debt if it is too high. Coricelli (2004) and Darvas, Martin, and Ragot (2018) have also proposed similar expenditure rules. Feld et al (2018) suggest scrapping escape clauses, sticking to the current fiscal targets, and augmenting them with a limit on nominal expenditure growth.  Boffinger (2020) calls for a “golden rule” which exempts public investments from deficit targets. See also Martin, Pisani-Ferry, and Ragot (2021) for another discussion of reforming fiscal rules and EU fiscal institutions.

Others suggest that forms of mutual insurance could aid countries meeting their SGP fiscal targets. Put differently, some of the temporary measures adopted in response to Covid-19 could be made permanent. Panel member Maria Demertzis writes in the FT that “The EU’s no bailout clause — which stipulates that no ember state is liable for the financial commitments of another — has been in effect replaced by the European Stability Mechanism as the lender of last resort for countries that are cut out of markets… Although intended as a one-off tool, this pooling of risks to issue common debt might have to be used again in the future to protect the single currency. More explicit co-ordination of policy along these lines is something EU member states will have to discuss.” Assistance at the EU level might include EU-level unemployment (re-)insurance, e.g. following the model of the SURE instrument, adopted during Covid-19. Tools at the federal will likely require a permanent expansion of fiscal capacity. Recent proposals to issue Coronabonds or ESBIES (Brunermeier et al 2012, 2016) differ in their details, but both involve borrowing at the EU level to partially collectivize EU fiscal capacity. A previous CfM-CEPR survey found support for proposals of this sort among panel members. Panelists also discussed the lack of clarity on whether borrowing at the EU level is joint or several.

This month’s CfM-CEPR survey asks whether and how EU fiscal rules should be changed. While the fiscal rules also hold for non-Eurozone members, the focus of the question is on EMU members. In this regard panel members were asked to opine on the following proposition:

Proposition 1: The existing fiscal rules for European Monetary Union members require revision.

Forty-one panel members responded to this question. 98% of the panel agreed that rules should be revised. This is the largest majority seen on any CfM-CEPR survey question to date. A single member rejected the notion that the rule require revision.

Panel members gave their alternatives to the existing framework in their response to the second question but voiced their opposition to the status quo in several ways. Some members believe that fiscal rules should never have been imposed. Jordi Galí (CREI, Universitat Pompeu Fabra and Barcelona GSE) writes, “I don't think there was any justification for having the rules to begin with if no bailout rule is enforced.” David Miles (Imperial College) agrees that it is “better to remove perceptions that there is a Euro backstop protecting euro denominated government bonds than create a set of fiscal rules that are not effective.” Simon Wren Lewis (University of Oxford) similarly claims that “Fiscal rules that focus on national government debt have caused the Eurozone great harm. It is time to rethink the whole basis of those rules, so they allow aggregate fiscal stimulus when interest rates hit their lower bound.” Jagjit Chadha (National Institute of Economic and Social Research) further disputes whether the Eurozone was never an optimal currency union and thus always required greater flexibility. He writes that fiscal rules “have been more honoured in the breach the observance. And have led to sub-optimal fiscal responses to the consequences of a monetary union that is itself not an optimal currency area.”

Others suggest that whatever their original merits, “Lots of water have passed under the bridge since the fiscal rules were formulated,” in the words of Morten Ravn (University College London). He adds that “it's time go back and do some serious work on this. Good fiscal rules are helpful in anchoring expectations, bad fiscal rules can hinder stabilization.” Following the Eurozone crisis and the Covid-19 pandemic, Pietro Reichlin Università LUISS G. Carli claims that “the 60% target for the debt-GDP ratio is totally out of reach for the foreseeable future.”

Evi Pappa (Universidad Carlos III de Madrid) refers to her paper given at the ECB Forum on Central Banking in Sintra in 2020, which shows that fiscal rules have become increasingly complex and added to political uncertainty. She writes that “Fiscal rules are complex and ever evolving in the European Monetary Union. Their strictness and occasional violations have increased political uncertainty in Europe. A revision is needed! Ramon Marimon (European University institute and UPF-Barcelona GSE) elaborates on the complexity of rules that “as the European Commission has recognised, the ad-hoc 'flexibility' introduced since the euro crisis has made the SGP too complex to be an accountability rule, not only because it's more difficult to assess compliance, but also because makes the SGP even less credible.” He adds that “the attempt to enforce the SGP with sanctions has proved, as expected, futile. Yet, NGEU [Next Generation EU] has shown, once more, that EU carrots work, much more than non-credible sticks. When the Maastricht targets were introduced, there was a big carrot ahead for countries which didn't have the entrance in the incoming European Monetary Union guaranteed and most of them comply.”

In the second question panel members asked for alternatives to the existing fiscal rules.

Question 2: Which of the following is the one reform you would choose to improve fiscal rules?

Forty-three panelists responded to this question. 30% of panel members support the formation of fiscal councils or replacing rules with norms. 26% support retaining but reforming fiscal rules to make them more flexible, countercyclical, or expenditure based. The vote-shares for these two options is reversed when weighing responses by experts self-assessed confidence levels. A further 21% (24% when weighed by confidence) would like to see an expansion of fiscal capacity at the EU level. Many panel members noted their support for a package including a combination of these three options: Indeed, all three appear in the 7+7 reform proposal. A smaller share of 16% would scrap EU-level fiscal rules altogether and renationalize fiscal policy. Finally, a single member (representing 2%) opted for stricter enforcement of existing fiscal rules.

The primary argument for fiscal councils or norms was that fiscal rules have become increasingly complex and are difficult to monitor. Councils would either arbitrate whether countries followed fiscal rules or more vaguely within good fiscal practices. Nicolas Oulton (London School of Economics) refers to this when writing that “The problem with rules is that they are impossible to draft in a way allowing for all contingencies.” The monitoring of fiscal policy therefore gets “bogged down in the bureaucratic silos which have plagued EU fiscal rules.” Jagjit Chadha adds that fiscal councils would instead give “a much fuller account of the fiscal paths for expenditure, revenue raising and debt issuance. A fiscal council can focus discussion on the normative aspects of policy as well as encourage counterfactual analysis of alternate policy choices.” Jorge Braga de Macedo (Nova School of Business and Economics, Lisbon) draws on his experience negotiating the Maastrict treaty in saying that the existing institutional framework leads the policy discussion “getting bogged down in the bureaucratic silos which have plagued EU fiscal rules,” and that fiscal councils and norms would avoid this. However, Nicolas Oulton ends by asking “how to persuade countries like Germany to agree to flexible standards rather than rigid rules?”

Supporters of alternative fiscal rules differed in the type of reform they’d pursue. Fabrizio Coricelli (Paris School of Economics) supports the calls for “Expenditure rules based on nominal expenditure targets related to expected GDP [that] would be automatically countercyclical and would ensure debt stability.”  “The transparency of the rule would justify stricter and more rigid enforcement and penalties, such as losing access to EU funds,” he argues. Volker Wieland (Goethe University Frankfurt and IMFS) who calls for no change, stricter rules, or better enforcement, agrees that “It would be sensible to put the focus on an expenditure-based rule in order to obtain a more transparent and enforcible handling of the rules. This can be achieved without a treaty change. The existing rules have been implemented in a very flexible manner. So lack of flexibility is not the problem.”

David Cobham (Heriot Watt University) calls for a package of fiscal councils, reformed rules, and EU-level fiscal capacity “to facilitate countercyclical policies, in the form of discretionary changes as well as automatic stabilisers, in conditions of sharp deviations (in either direction) from trend/potential output, but also (b) to require consolidationary changes to return debt ratios to broadly appropriate levels when conditions have stabilised.” Costas Milas (University of Liverpool) has a different proposal in the form of a “dual mandate in which the budget deficit-to-GDP ratio is equal to 3% but, at the same time, can rise depending on whether a country records governance improvements.” Finally, Simon Wren-Lewis proposes “National fiscal rules [that] focus on real exchange rate (price level) harmonisation among EZ countries using national fiscal stimulus or contraction. If this is achieved, then national debt will look after itself.”

In supporting expanded EU level fiscal capacity, Evi Pappa states that “permanent central fiscal capacity [could be used to] address large shocks and possible finance of spending (like in infrastructure and education) that involves positive externalities that regional policymakers might fail to internalise are desirable features of a possible revision.” Francesca Monti (Kings College London) notes that this would have the added positive aide effect of “facilitating convergence and increase the effectiveness of euro-area-wide monetary policy.” Ramon Marimon points out that fiscal capacity has already expanded over the past decade and that expanded fiscal capacity in the longer run is therefore inevitable. He calls for “'permanent SURE, or state-contingent debt), even if to a large extent fiscal policy will remain in the hands of the MS. For them a revised/simplified SGP can be a complement to the new & more powerful EU/EA fiscal instruments that can act, again, as a carrot.” Thorsten Beck (Cass Business School) believes that expanded fiscal capacity would be complemented by a complete banking union.

Proponents of re-nationalizing fiscal policies argue that there are “No obvious negative externalities from ‘excessive’ deficits under no bailout,” in the words of Jordi Galí. Instead he suggests that “markets [should] punish ‘irresponsible’ or ‘risky’ fiscal behavior.” Patrick Minford (Cardiff Business School) points to simulations conducted at his university based on DSGE models that indicate that national fiscal policies would improve macroeconomic stability.

References and Further Readings

Baldwin, Richard and Francesco Giavazzi How to fix Europe’s monetary union: Views of leading economists, VoxEU Ebook. https://voxeu.org/content/how-fix-europe-s-monetary-union-views-leading-economists

Bénassy-Quéré, Agnès, Markus Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro, and Jeromin Zettelmeyer, “Reconciling risk sharing with market discipline: A constructive approach to euro area reform,” CEPR Policy Insight 91, January 2018.

Bilbiie, Florin, Tommaso Monacelli, and Roberto Perotti, “Fiscal Policy in Europe: Controversies over Rules, Mutual Insurance, and Centralization,” Journal of Economic Perspectives, 35(2), 2021.

Blanchard, Olivier, Álvaro Leandro, and Jeromin Zettelmeyer, “Redesigning EU fiscal rules: From rules to standards,” PIIE working Paper21-1, 2021.

Beetsma, Roel, et al. “Reforming the EU fiscal framework: A proposal by the European Fiscal Board”, in VoxEU articles, 26 October 2018. Available at: https://voxeu.org/.

Beetsma, Roel & Martin Larch, “Risk reduction and risk sharing in EU fiscal policymaking: The role of better fiscal rules”, in VoxEU articles, 10 May 2018. Available at: https://voxeu.org/.

Beetsma, Roel & Harald Uhlig. “An Analysis of the Stability and Growth Pact”, Economic Journal Vol. 109, No. 458 (Oct., 1999), pp. 546-571.

Bofinger, Peter, “Easing the EU fiscal straitjacket”, in Social Europe, 14 December 2020. Available at: https://socialeurope.eu/.

Brunnermeier, Markus et al. “European Safe Bonds: ESBies,” 2012. Available at : https://personal.lse.ac.uk/vayanos/Euronomics/ESBies.pdf

Brunnermeier, Markus, et al. “ESBies: Safety in the tranches”, in VoxEU Articles, 20 September 2016. Available at : https://voxeu.org/.

Brunnermeier, Markus K., Harold James, and Jean-Pierre Landau, The Euro and the Battle of Ideas, Princeton, NJ: Princeton University Press, 2016.

Chadha, Jagjit S., Hande Küçük and Adrian Pabst, “Proposals for a New Fiscal Framework,” in Designing a New Fiscal Framework: Understanding and Confronting Uncertainty, Chadha, Jagjit S., Hande Küçük and Adrian Pabst eds. NIESR Occasional Paper LXI.

Coricelli, Fabrizio, “Fiscal policy in an enlarged EU," Revue de l'OFCE, Presses de Sciences-Po, 2004, vol. 91(5), p. 191-208

Darvas, Zsolt, Philippe Martin & Xavier Ragot, “European fiscal rules require a major overhaul”, Bruegel, Policy Contribution Issue n˚18, October 2018.

Eichengreen, Barry and Charles Wyplosz, “The Stability Pact: More than a Minor Nuisance?”  Economic Policy 26, pp.67-113, 1998.

Eijffinger, Sylvester, & Jakob de Haan, European Monetary and Fiscal Policy, 2000, Oxford University Press.

European Commission, “Rethinking the European Fiscal Framework”, Available at:  https://ec.europa.eu/.

Fatas, Antonio, “Fiscal Policy, Potential Output and the Shifting Goalposts”, IMF Economic Review 67 (2019).

Fatas, Antonio, “Self-fulfilling pessimism: The fiscal policy doom loop”, in VoxEU Articles, 28 September 2018. Available at: https://voxeu.org/.

Fatas, Antonio & Lawrence Summers, “The Permanent Effects of Fiscal Consolidations”, Journal of International Economics, 112, 2018.

Feld, Lars, Christoph Schmidt, Isabel Schnabel, and Volker Wieland, “Refocusing the European fiscal framework,” VoxEU, September 2018. https://voxeu.org/article/refocusing-european-fiscal-framework

Galí, Jordi and Roberto Perotti, “Fiscal policy and monetary integration in Europe”, Economic Policy Vol. 18, No. 37, EMU Assessment (Oct., 2003), pp. 533-572.

Martin, Phillippe, Jean Pisani-Ferry, and Xavier Ragot, “Reforming the European Fiscal Framework,” Les notes du conseil d’analyse économique, no 63, April 2021.

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Strongly agree Extremely confident
The fiscal rules have their origin in targets for debt and deficits akin to inflation targets for monetary policy. They have been more honoured in the breach the observance. And have led to sub-optimal fiscal responses to the consequences of a monetary union that is itself not an optimal currency area. This would require more not less flexibility but at the same time a credible framework. As we have learnt in the UK, politicians tend to guard their control over the public purse. A framework that allows politicians to meet the demands of their electorate but also adopt more robust revenue raising and targeted expenditure would be a for which prize it was worth fighting.
Ramon Marimon's picture Ramon Marimon European University institute and UPF-BarcelonaGSE Strongly agree Extremely confident
The SGP debt/deficit targets are meaningless if the Escape Clause is deactivated within the incoming years (now the eurogroup says 2023). But there are two, possibly more important reasons. First, as the European Commission has recognised, the ad-hoc 'flexibility' introduced since the euro crisis has made the SGP too complex to be an accountability rule, not only because it's more difficult to assess compliance, but also because makes the SGP even less credible: with a new twist compliance can be achieved! Second, the attempt to enforce the SGP with sanctions has proved, as expected, futile. Yet, NGEU has shown, once more, that EU carrots work, much more than non-credible sticks. When the Maastricht targets were introduced, there was a big carrot ahead for countries which didn't have the entrance in the incoming European Monetary Union guaranteed and most of them comply (well, not all, as it's known).
John Hassler's picture John Hassler Institute for International Economic Studies (IIES), Stockholm University Strongly agree Very confident
Jordi Galí's picture Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Strongly agree Very confident
I don't think there was any justification for having the rules to begin with if no bailout rule rule is enforced.
Francesca Monti's picture Francesca Monti Kings College London Agree Confident
Volker Wieland's picture Volker Wieland Goethe University Frankfurt and IMFS Agree Confident
The existing rules are workable but need to be strengthened to achieve their goal "consolidation of finances in good times to create fiscal room for maneuver in bad times". Most importantly, they need to be followed. Too often they have been disregarded. Of course, the corona exception is the correct decision. However we need to get back to a stability-oriented and sustainable fiscal policy when the economy is back above the pre-crisis level. There are sensible proposals to switch to emphasize an expenditure-based rule without having to change the Maastricht treaty.
Dawn Holland's picture Dawn Holland NIESR Agree Extremely confident
David Cobham's picture David Cobham Heriot Watt University Strongly agree Very confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics Agree Very confident
The background to this is the policy of austerity forced on Eurozone members following the global financial crisis. There is a general belief that the euro could not survive another similar episode: one or more members would break away. Hence to save the euro more flexibility is required. But this runs up against the adamant refusal of Germany (and others) to be part of a transfer union under which they are responsible for the debts of their fellow members. Squaring this circle is necessary for any reform to be agreed.
Thorsten Beck's picture Thorsten Beck Cass Business School Strongly agree Very confident
The current rules do not make any macroeconomic sense and are being ignored anyway (also, b/c they are not enforceable).
Robert Kollmann's picture Robert Kollmann Université Libre de Bruxelles Disagree Confident
Alexander Ludwig's picture Alexander Ludwig Goethe University Strongly agree Extremely confident
artificially generated from a steady state relationship, depending on strong parametric assumptions; not consistent with a dynamic environment.
Kevin Hjortshøj O'Rourke's picture Kevin Hjortshøj... NYU Abu Dhabi Strongly agree Extremely confident
Paul De Grauwe's picture Paul De Grauwe London School of Economics Strongly agree Very confident
Fabrizio Coricelli's picture Fabrizio Coricelli Paris School of Economics Strongly agree Extremely confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Strongly agree Very confident
The EU's fiscal rules are based on the Stability and Growth Pact. They are arbitrary, inflexible, inappropriate and based on an incorrect formulation of the problem. The correct criterion is that sovereign debt should be sustainable: i.e. governments should be able to service and redeem their debt. This permits much more flexibility than the EU's rules and covers all situations for countries whether in a monetary union, having a fixed or a floating exchange rate. The sustainability of the EU's rules is based on a deficit of 3% of GDP, a debt GDP ratio of 60% and inflation of 5%. None of these is either necessary or sufficient to achieve debt sustainability. Their only possible justification is that they are simple. To implement a debt sustainability rule governments should publish detailed plans which can be assessed for their plausibility.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Strongly agree Confident
Roel Beetsma's picture Roel Beetsma University of Amsterdam Strongly agree Extremely confident
The rules have become complex, intransparent and are applied with substantial arbitrariness
Antonio Fatás's picture Antonio Fatás INSEAD, Singapore Strongly agree Extremely confident
Jorge Braga de Macedo's picture Jorge Braga de ... Nova School of Business and Economics, Lisbon Agree Extremely confident
Ever since fiscal rules were discussed in preparation to the 1991 intergovernmental conference their practical effectiveness has been disputed due to the very different budgetary procedures of member states and indeed the ones agreed at Maastricht were quickly revised in the Treaty of Amsterdam. It is therefore tempting to remain indifferent rather than strongly agreeing or disagreeing. Nevertheless, I agree with a revision because the link between fiscal and financial stability uncovered by the euro crisis of 2010-14 has become stronger in the subsequent environments, not least the pandemic.
Cédric Tille's picture Cédric Tille The Graduate Institute, Geneva Strongly agree Very confident
Roger Farmer's picture Roger Farmer University of Warwick Agree Confident
John VanReenen's picture John VanReenen London School of Economics Agree Confident
Patrick Minford's picture Patrick Minford Cardiff Business School Strongly agree Extremely confident
Given the asymmetric shocks hitting the eurozone regions/countries, a unitary monetary policy cannot be an effective stabiliser. But national fiscal policy under normal budget constraints can. Simulations we have done in Cardiff on a New Keynesian DSGE model of the eurozone suggest these policies, absent the SGP, can be highly effective
Mirko Wiederholt's picture Mirko Wiederholt Science Po Agree Confident
David Miles's picture David Miles Imperial College Agree Confident
The justification for restrictions on national fiscal policies has always seemed flimsy and that may be one reason why whenever they have seemed to bind there is reluctance to really make them apply in a meaningful way. It is the existence of a (misplaced) belief that bailing out a euro area government facing default on its debt is somehow warranted that underlies much of the case for restrictions on national policy. Better to remove perceptions that there is a Euro backstop protecting euro denominated government bonds than create a set of fiscal rules that are not effective.
Pietro Reichlin's picture Pietro Reichlin Università LUISS G. Carli Strongly agree Very confident
My main point is that the 60% target for the debt-GDP ratio is totally out of reach for the forseeable future and probably unmotivated. The EU institutions should exert pressure to enhance countercyclical fiscal policies and debt stabilization in addition to giving a strong role to the ESM and the ECB in sovereign debt market. I don't think that debt mutualization is a realistic option without major advancements in EU level political integration.
Sir Charles Bean's picture Sir Charles Bean London School of Economics Strongly agree Very confident
Moritz Schularick Strongly agree Very confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Agree Extremely confident
Lucio Sarno's picture Lucio Sarno Cambridge University Agree Confident
Evi Pappa's picture Evi Pappa European University institute Strongly agree Extremely confident
Fiscal rules are complex and ever evolving in the European Monetary Union. Their strictness and occasional violations have increased political uncertainty in Europe. A revision is needed! For more details see reference below: Evi Pappa "Fiscal Rules, Policy and Macroeconomic Stabilization in the Euro Area," ECB Sintra Forum proceedings (available at https://www.ecb.europa.eu/pub/conferences/shared/pdf/20201111_ECB_Forum/academic_paper_Pappa.pdf)
Gernot Müller's picture Gernot Müller Eberhard-Karls-Universität Tübingen Strongly agree Confident
Linda Yueh's picture Linda Yueh London Business School Agree Confident
Philip Jung's picture Philip Jung University of Dortmund Agree Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Strongly agree Extremely confident
Fiscal rules that focus on national government debt have caused the Eurozone great harm. It is time to rethink the whole basis of those rules, so they allow aggregate fiscal stimulus when interest rates hit their lower bound.
Morten Ravn's picture Morten Ravn University College London Agree Very confident
Lots of water have passed under the bridge since the fiscal rules were formulated. We have now the ESM and we have also experienced two very large recessions and a sovereign debt crisis in Europe. It is time to revisit the SGP and the fiscal rule set: Does it serve its purpose? Do the rules allow countries to manage crisis periods? How effective are they in addressing moral hazard, how does the existence of the ESM affect this? The set of rules are also very complicated which is unhelpful. In sum, it's time go back and do some serious work on this. Good fiscal rules are helpful in anchoring expectations, bad fiscal rules can hinder stabilization.
Maria Demertzis's picture Maria Demertzis Strongly agree Very confident
Current rules not fit for purpose.
Marcel Fratzscher's picture Marcel Fratzscher DIW Berlin and Humboldt University Berlin Strongly agree Very confident
e.g. along the lines of our proposal in Bénassy-Quéré et al (2018).
Natalie Chen's picture Natalie Chen University of Warwick Agree Confident
Costas Milas's picture Costas Milas University of Liverpool Agree Confident

Question 2

Participant Answer Confidence level Comment
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Fiscal councils or fiscal standards Very confident
We need to move away from the debt and deficits obsession to a much fuller account of the fiscal paths for expenditure, revenue raising and debt issuance. A fiscal council can focus discussion on the normative aspects of policy as well as encourage counterfactual analysis of alternate policy choices. It should also be able to offer critiques (positive or negative) of government and opposition policies. Ultimately the fiscal council should offer counsel.
Ramon Marimon's picture Ramon Marimon European University institute and UPF-BarcelonaGSE Expansion of EU level fiscal capacity for expanded mutual insurance Very confident
The EU and the euro area have changed after the euro and Covid-19 crises (and Brexit), the ECB has played a leading role with a monetary and fiscal mixed, with some shortcomings similar to the role the the FRB and the US Treasury have played in the financial and Covid-19 crises, with the difference that the ECB had to do it on its own; well together with ESM as crisis resolution mechanism. In any case, an excessive burden. Now the European Commission is, in practice, creating a 'temporary EU Treasury' to fund NGEU, and will issue eurobonds to this end. Meanwhile, the Eurosystem holds more than 20% (close to 30% counting lasts purchases? the limit is 33%!). In sum, euro area debt (national and EU) will play a very different role in the aftermath of the Covid-19 crisis, as to think that a --say, simplified -- SGP can be the center of the EU and EA fiscal policy. There is a need for a unified EU\EA fiscal policy, and for the corresponding institutional development, since the fiscal stakes at the EU\EA level are high and new permanent instruments can be developed without changing Treaties (e.g. EU automatic stabilisers, as a 'permanent SURE, or state-contingent debt), even if to a large extent fiscal policy will remain in the hands of the MS. For them a revised/simplified SGP can be a complement to the new & more powerful EU/EA fiscal instruments that can act, again, as a carrot.
John Hassler's picture John Hassler Institute for International Economic Studies (IIES), Stockholm University Fiscal councils or fiscal standards Confident
Jordi Galí's picture Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Re-nationalization of fiscal discipline Very confident
No obvious negative externalities from "excessive" deficits under no bailout. Let markets punish "irresponsible" or "risky" fiscal behavior.
Francesca Monti's picture Francesca Monti Kings College London Expansion of EU level fiscal capacity for expanded mutual insurance Confident
A higher degree of co-ordination of fiscal policy at an EU level would also facilitate convergence and increase the effectiveness of euro-area-wide monetary policy.
Volker Wieland's picture Volker Wieland Goethe University Frankfurt and IMFS No change, stricter rules, or better enforcement Confident
It would be sensible to put the focus on an expenditure-based rule in order to obtain a more transparent and enforcible handling of the rules. This can be achieved without a treaty change. The existing rules have been implemented in a very flexible manner. So lack of flexibility is not the problem.
Dawn Holland's picture Dawn Holland NIESR More flexible, countercyclical, or expenditure-based rules Very confident
The second and fourth options would also form part of a thorough overhaul.
David Cobham's picture David Cobham Heriot Watt University More flexible, countercyclical, or expenditure-based rules Confident
What is crucial is (a) to facilitate countercyclical policies, in the form of discretionary changes as well as automatic stabilisers, in conditions of sharp deviations (in either direction) from trend/potential output, but also (b) to require consolidationary changes to return debt ratios to broadly appropriate levels when conditions have stabilised. The precise institutional form within which this is achieved is of secondary importance.
Wendy Carlin's picture Wendy Carlin University College London Fiscal councils or fiscal standards Not confident
Unenforceable rules especially for overly tight fiscal policy remain a problem with proposals to reform the rules. Perhaps the experience with COVID makes the time right to push for expansion of EU fiscal capacity / mutual insurance as the norm in the form of automatic stabilizers. This could complement the work of fiscal councils working to common standards.
Nicholas Oulton's picture Nicholas Oulton London School of Economics Fiscal councils or fiscal standards Confident
The problem with rules is that they are impossible to draft in a way allowing for all contingencies. Even for monetary policy which is arguably simpler than fiscal policy rules have been abandoned in favour of a framework (e.g. inflation targeting) which leaves a large role for discretion. But then the dilemma pointed out in my answer to question 1 rears up again: how to persuade countries like Germany to agree to flexible standards rather than rigid rules?
Thorsten Beck's picture Thorsten Beck Cass Business School Expansion of EU level fiscal capacity for expanded mutual insurance Very confident
Both the euro sovereign debt and the current Covid crises have shown that the euro can only be a sustainable currency union with a minimum of risk sharing. Such risk-sharing can be private (capital markets and banks) or government-focused. Both mechanisms have to be strengthened and also depend on each other. A complete banking union (with backstop and European deposit insurance) is a first step into fiscal union, though a very partial one. Steps like the Recovery Plan are a further step. In the medium- to long-term, further strengthening of euro-level fiscal capacity, which enables counter-cyclical policies and insurance mechanisms will be necessary.
Robert Kollmann's picture Robert Kollmann Université Libre de Bruxelles Expansion of EU level fiscal capacity for expanded mutual insurance Confident
Alexander Ludwig's picture Alexander Ludwig Goethe University More flexible, countercyclical, or expenditure-based rules Very confident
Kevin Hjortshøj O'Rourke's picture Kevin Hjortshøj... NYU Abu Dhabi Re-nationalization of fiscal discipline Confident
Paul De Grauwe's picture Paul De Grauwe London School of Economics Fiscal councils or fiscal standards Confident
This question is difficult to answer as 2, 3 and 4 are not exclusive and could be implemented together.
Fabrizio Coricelli's picture Fabrizio Coricelli Paris School of Economics More flexible, countercyclical, or expenditure-based rules Extremely confident
Expenditure rules based on nominal expenditure targets related to expected GDP would be automatically countercyclical and would ensure debt stability. The transparency of the rule would justify stricter and more rigid enforcement and penalties, such as losing access to EU funds.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Re-nationalization of fiscal discipline Very confident
Each country should implement the sort of debt sustainability rule set out in my answer to question 1. A fiscal council should then assess whether they are plausible. This would have the added advantage of avoiding fiscal federalism.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Fiscal councils or fiscal standards Not confident
Roel Beetsma's picture Roel Beetsma University of Amsterdam Other or no opinion Very confident
it would be better to focus on a long-run debt target and impose (as intermediate target) a maximum spending growth rule in line with potential output growth and with a correction to reach the long run debt target, if debt currently exceeds it. Fiscal councils can play a useful role, but this strongly depends on their design. Many of them currently too weak. You need to combine EU wide rules with increased responsibility at the national level
Antonio Fatás's picture Antonio Fatás INSEAD, Singapore Fiscal councils or fiscal standards Very confident
Jorge Braga de Macedo's picture Jorge Braga de ... Nova School of Business and Economics, Lisbon Fiscal councils or fiscal standards Very confident
It is not clear from the question what the "impact" variables (output, inflation, unemployment, inequality) would be at what horizon (quarter, fear, decade) and the complementarity between the alternatives to the existing fiscal rules should not be discarded. Nevertheless, my experience with the Maastricht treaty (which I signed on behalf of Portugal) and the effectiveness of the Fiscal Council created in 2012, at the time of the adjustment program agreed with the “troika”, suggest that enhancing the complementarity between fiscal councils and norms would avoid getting bogged down in the burocratic silos which have plagued EU fiscal rules.
Cédric Tille's picture Cédric Tille The Graduate Institute, Geneva Fiscal councils or fiscal standards Confident
Roger Farmer's picture Roger Farmer University of Warwick Re-nationalization of fiscal discipline Not confident
John VanReenen's picture John VanReenen London School of Economics Fiscal councils or fiscal standards Not confident
Patrick Minford's picture Patrick Minford Cardiff Business School Re-nationalization of fiscal discipline Very confident
As noted in my first response, national fiscal responses can greatly improve macro stability, without creating concerns about a 'transfer union'. Only for exceptional shocks where mutual assistance is needed, should the EU be involved in joint action.
Mirko Wiederholt's picture Mirko Wiederholt Science Po Expansion of EU level fiscal capacity for expanded mutual insurance Confident
Pietro Reichlin's picture Pietro Reichlin Università LUISS G. Carli More flexible, countercyclical, or expenditure-based rules Very confident
I think that rules are important and may be effective. But, given the level of uncertainty about the relative importance of moral hazard (in the conduct of national fiscal policies), about the size of fiscal multipliers and potential output, I think that some degree of flexibility is desirable.
David Miles's picture David Miles Imperial College Re-nationalization of fiscal discipline Confident
Partial centralisation (either real or anticipated) of responsibility for making good on debt repayment of euro area government bonds is a bad place remain.
Ugo Panizza's picture Ugo Panizza The Graduate Institute, Geneva (HEID) Fiscal councils or fiscal standards Not confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Fiscal councils or fiscal standards Confident
Moritz Schularick Expansion of EU level fiscal capacity for expanded mutual insurance Very confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Expansion of EU level fiscal capacity for expanded mutual insurance Not confident
Lucio Sarno's picture Lucio Sarno Cambridge University Fiscal councils or fiscal standards Not confident
Evi Pappa's picture Evi Pappa European University institute Expansion of EU level fiscal capacity for expanded mutual insurance Very confident
A combination of a debt anchor (recognising the limitation of one-size-fits-all and allowing differentiation depending on countries’ needs and capacities) with a single operational expenditure rule and the creation of a permanent central fiscal capacity to address large shocks and possible finance of spending (like in infrastructure and education) that involves positive externalities that regional policymakers might fail to internalise are desirable features of a possible revision.
Gernot Müller's picture Gernot Müller Eberhard-Karls-Universität Tübingen Re-nationalization of fiscal discipline Very confident
Linda Yueh's picture Linda Yueh London Business School Other or no opinion Confident
Philip Jung's picture Philip Jung University of Dortmund More flexible, countercyclical, or expenditure-based rules Not confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford More flexible, countercyclical, or expenditure-based rules Extremely confident
National fiscal rules should focus on real exchange rate (price level) harmonisation among EZ countries using national fiscal stimulus or contraction. If this is achieved then national debt will look after itself. If the EZ wants to reduce aggregate government debt, or increase it at the interest rate lower bound, it should be done uniformly across countries.
Costas Milas's picture Costas Milas University of Liverpool More flexible, countercyclical, or expenditure-based rules Confident
A more flexible fiscal rule could take the form of a “dual mandate” in which the budget deficit-to-GDP ratio is equal to 3% but, at the same time, can rise depending on whether a country records governance improvements. Assume, for instance, that a country records an improvement in its government effectiveness (proxied by the country's World Bank government effectiveness indicator relative to the EU average). Consequently, this very country could be allowed to record a higher budget deficit compared to another country which experiences a deterioration in government effectiveness. In other words, commitment to structural reforms will provide a strong signal that the country in question “means business” and therefore be allowed some flexibility with reference to its budget deficit.
Morten Ravn's picture Morten Ravn University College London Expansion of EU level fiscal capacity for expanded mutual insurance Very confident
I think risk sharing through a central budget would be the most effective. But at the same time, I can't see it happening for political reasons. As a second best, I would probably allow for some further flexibility, maybe have a European fiscal council but such councils take a long time creating credibility (the Swedish and the Danish institutions have both been around for quite a while and have much higher credibility than, for example, the British equivalent) so will not be a short run option. Moral hazard, of course, remains an issue but I am not sure it is the biggest issue at the moment.
Marcel Fratzscher's picture Marcel Fratzscher DIW Berlin and Humboldt University Berlin More flexible, countercyclical, or expenditure-based rules Confident
Maria Demertzis's picture Maria Demertzis More flexible, countercyclical, or expenditure-based rules Very confident
Natalie Chen's picture Natalie Chen University of Warwick More flexible, countercyclical, or expenditure-based rules Not confident