Proposals for the reform of EU fiscal rules

Abstract

The aim of this paper is to contribute to the ongoing debate regarding the reform of the EU fiscal framework, with a special focus on fiscal sustainability for Greece. Our key policy proposals for the EU fiscal rules draw on lessons from past experience, the conclusions of relevant studies and the fiscal sustainability risks faced by Greece and other high-debt countries in the euro area. To this end, we use the European Fiscal Board’s Compliance Tracker Dataset to assess compliance with the existing SGP framework. Moreover, we employ the Bank of Greece’s Debt Sustainability Analysis (DSA) model to identify possible fiscal sustainability risks for Greece over the medium- to long-term horizon, taking into account alternative economic policy scenarios (including a debt rule scenario). Our main findings indicate that the revised fiscal framework should focus on the need to enhance sustainability of public debt as a key priority, by setting a debt anchor as a medium-term fiscal objective, with a single operational expenditure rule that promotes countercyclicality of fiscal policy. The current benchmark levels could be maintained and complemented with the appropriate flexibility in the rate of debt reduction to address cross-country heterogeneity and avoid self-defeating effects of fiscal policy. In the case of Greece, despite the favourable characteristics of public debt, fiscal policy in the short and medium term should focus on accelerating debt reduction. The exposure of Greece’s public debt dynamics to market and interest rate risks will gradually increase, as official sector debt is replaced by market financing, thereby changing the structure of public debt and highlighting the need to create fiscal buffers in order to increase its resilience to future adverse macroeconomic shocks.