Abstract
Because they exert cross-border spillover effects, fiscal policies of individual EU member states are a common concern for the entire EU.
Highlights
In the year before the eruption of the coronavirus crisis, the European Fiscal Board (EFB, 2019) offered President Juncker of the European Commission advice
The Stability and Growth Pact (SGP) had numerous ailments: (i) rules were complex and opaque, based on unobservable indicators, while the use of multiple indicators allowed cherry-picking so as to give countries the benefit of the doubt when needed; (ii) medium-term planning was weak, while planned adjustment was back-loaded; and (iii) political considerations interfered with economic assessment, while surveillance was becoming increasingly bilateral between the Commission and the country surveyed
EU level fiscal surveillance under a common set of budgetary rules will remain necessary for a well-functioning EU. With their more detailed knowledge of their own country’s situation, national independent fiscal institutions (IFIs) could assume a larger role in monitoring national debt developments, especially when the SGP is revised and debt reduction requirements become more tailor made to the specific situation of individual countries
Summary
Because they exert cross-border spillover effects, fiscal policies of individual EU member states are a common concern for the entire EU. An expansionary fiscal stance in one country raises imports from other countries, thereby stimulating their economies (Beetsma et al, 2006; Alcidi et al, 2015) It pushes up the country’s public debt and magnifies solvency risk, which may spill over to other member states or force them to come to the financial rescue. These spillovers provide the main rationale for the EU’s Stability and Growth Pact (SGP), the most visible elements of which are the 3% of GDP reference value for the deficit and the 60% reference value for the public debt.. The SGP is the answer to the fear that markets cannot adequately fulfil this role, creating a risk that the no-bailout clause will be tested, which is exactly what has happened
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