Coronavirus highlights ‘unsuitable’ EU fiscal rules, economists claim

2 Apr 20

The coronavirus crisis has shown the EU’s fiscal rules to be in immediate need of reform, senior economists at Finland’s national audit office have claimed.

 

The EU activated an escape clause in the so-called Stability and Growth Pact in late March, allowing member states in the eurozone to deviate from its usually strict requirements, namely a budget deficit of less than 3% and public debt of less than 60% of GDP.

“Full flexibility can prove to be an effective tool in dealing with the current crisis. However, in the future, the regulatory framework should, as a matter of priority, ensure the long-term sustainability of member states' public finances and the accumulation of economic buffers in good economic times,” argued economists Matthias Strifler and Jenni Watchmaker in an article for the National Audit Office of Finland.

“The sustainability of public finances is a prerequisite if there is room for recovery when the next crisis hits. The rules are in dire need of reform as soon as this crisis is resolved.”

The pair criticised the existing framework for being too supportive of pro-cyclical fiscal policies – encouraging policies that are too loose in a boom period and too tight in a downturn, intensifying economic cycles and increasing the damage caused by downturns.

They also said that current low interest rates have changed the way the rules should treat debt.

The Stability and Growth Pact is too strict on countries such as Germany, which has low public debt and has strong trade links with other eurozone countries, they said.

“The positive externalities of growth-oriented fiscal policies between countries are increasing. This means that Finland will benefit, for example, from the recovery measures taken by Germany,” Strifler and Watchmaker said.

“Thus, in some cases, higher debt levels in one country may have a positive impact on other countries.”

However, in countries in different circumstances, such as Greece, the opposite is true, the pair said, adding that the framework needs to change to reflect the differences between countries.

They suggested that creating ‘standards’ rather than rules would be the best solution, meaning fiscal policies would be assessed on a case-by-case basis with a code of conduct that could be applied to a wide variety of situations.

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