What future for EU fiscal rules?
JHE SCHLESWIG-HOLSTEIN question, a 19th-century diplomatic teaser, was said to be so complicated that of the three people who had ever figured it out, one had forgotten everything, another had died, and the third had gone mad. Readers of the European Commission’s 108-page “Vade Mecum” on the Stability and Growth Pact (PSC), the European Union’s fiscal rulebook, could sympathize. Over the years, the rules have spawned a bewildering array of exceptions, possibilities for interpretation, and opt-out clauses. No finance minister in Europe fully understands them, says a Brussels insider.
Yet at the heart of EUare based on two simple figures, anchored in the Maastricht Treaty of 1992: governments must strive to maintain budget deficits of no more than 3% of GDP and to cap the outstanding public debt at 60% of GDP. As countries prepared to enter a monetary union without a central fiscal authority, rules were needed to tie the hands of spenders. The counterpart of strict rules was a politicized enforcement process. In 2003, France and Germany exceeded the deficit threshold and then intimidated the rest of the EU by letting them escape unpunished; a blow to the credibility of the rulebook from which some say it never recovered. No country has ever faced the fines that theoretically apply to serious disbelievers.
Fiscal rules have been periodically changed over the years. Brussels moved away from the big goals to focus on “structural” deficits that sought to eliminate the effect of the economic cycle. But conjuring up reliable real-time estimates has been impossible, often forcing governments to tighten prematurely. In 2011, members agreed that debt levels above the 60% limit should be reduced by one-twentieth each year. The “fiscal pact”, voted at the instigation of Germany in 2012, obliges governments to try to keep structural deficits close to zero. In 2015, the commission clarified the cases in which exemptions could be granted, including structural reforms with upfront costs and public investments.
All this gave birth to the monster that Europe knows today. This proliferation of rules has allowed for more nuanced negotiations between the commission and governments, argues Gregory Claeys of Bruegel, a think tank in Brussels. The price is a loss of accountability and transparency. The committee could order a finance minister, answerable to a national parliament, to reduce his deficit by a few percentage points while holding out the prospect of invoking a safeguard clause later – and a few months later, when the cycle will have been recalculated, say something different. “That’s when you start debating, should I tell the Prime Minister or should I just ignore the blighters?” says Thomas Wieser, a former eurozone official. Mistrust is still fueled by governments who often find it easier to blame slow growth on constraints from Brussels rather than on their reluctance to reform.
In February, the European Commission announced a further revision of the rules. Covid-19 has put him on ice but could also affect his outcome. the PSC is on hold until the end of 2021, to allow governments facing plummeting revenues and huge social bills to run large deficits. This provides space for a broader debate. The Italian government, with a debt close to 160% of GDP (see graph), it is hardly expected to reduce it by five percentage points per year. And with monetary policy running out of ammunition, fiscal policy will have to do more for the recovery.
For some, the rules have completely lost their usefulness. In a new article, Olivier Blanchard, former chief economist of the IMF, and two co-authors argue that in a world where nominal growth is likely to outpace interest rates for a long time, the debt burden may be sustainable at levels far higher than one might have imagined. when drafting the Maastricht Treaty. The authors suggest replacing the tangle of rules with looser “norms” and applying a debt sustainability test to countries’ fiscal plans.
Such ambitious plans have no chance of becoming reality – and not just because they would mean reopening the EUthe treaties. A more moderate proposal, put forward among others by the European Fiscal Board, an advisory body to the commission, calls for a simpler framework: a debt “anchor” (which some suggest could be above 60 %), and a spending rule that will reduce excessive debt, but adjust the pace of austerity when growth is slow. The commission itself wants to better distinguish between investment and current expenditure.
France in particular is calling for changes. But few subjects divide the EU‘s members as fiscal policy. And the debate will only begin in earnest next year. For now the EU focuses on implementing a 750 billion euro ($880 billion) stimulus package agreed in July. Some hope that this fund could be a stepping stone to the kind of permanent European fiscal capacity that would make the rules for national governments less relevant. But that’s an argument for another day. ■
This article appeared in the Finance & Economics section of the print edition under the title “The Tax Question”