01
02
03
04
2022
PROPOSAL
The “primary” 3% deficit / GDP and 60% debt / GDP rules could be interpreted as very long-term targets only, while the “secondary legislation” governing the adjustment process could be modified to make room for country-specific, medium-term optimal debt targets based on stochastic debt sustainability analysis. A spending rule would then ensure that public expenditures do not rise more than potential GDP growth (if no adjustment is needed) or less (if adjustment is needed). This rule could also make room for an adjustment account that would capture limited deviations, to be drawn or paid down in subsequent years.
05
05
Long run
ADVANTAGE
The main advantage is that this proposal does not have the procyclicality of the current deficit rules. It is also much easier to communicate (compared to the rules based on the unobservable structural deficits that are part of the “secondary” legislation).
ADVANTAGE
PROPOSAL
While this proposal may open the door to moral hazard, we note that a public investment strategy needs to overcome many more obstacles than just those of its financing (notably bureaucratic and political decision and implementation challenges). Spending rule exemption clauses could be tied to supply-side reform commitments and be dependent on the magnitude of investment schemes financed at the EU level. There could be the possibility of a privileged access to those EU funds for fiscally compliant countries.
Due to its different implications for the future (as public capital formation should lead to higher output and taxes over the long term), there is a strong case that investment spending should be treated differently from current spending.
ADVANTAGE
PROPOSAL
There is room to give more teeth (including the power to reject the budget, at least temporarily) to Independent Fiscal Institutions supervised by an EU institution that would define common methods and process. Giving the European Court of Justice jurisdiction over breaches of fiscal rules (which is not currently the case, but has been proposed) is probably not appropriate, as, given the potential of many international spill overs of a sovereign default, an intragovernmental process should retain the final word.
This proposal would overcome the weaknesses of the current sanction process that is considered counterproductive, as sanctions would hit countries likely to already be in a dire economic and financial state, exacerbating the risk of extreme politicisation of the topic.
ADVANTAGE
PROPOSAL
The debt issued by a country in accordance with EU rules (essentially the debt up to 60% of GDP) would be senior (possibly with some guarantees from the rest of the EU) while the excess debt would be junior. To maintain the sanction principle, the junior debt would be ineligible to ECB QE operations and disincentives should help to minimise its holding by the banking system. An orderly sovereign default process would also need to be set up (only for the junior debt).
A “blue debt / red debt” system would create an ex-ante, built in and non-politicised de facto sanction system. The non-compliant country would have to pay higher interest rates yet to be determined by the market and with no ex-post decision by the EU.
ADVANTAGE
PROPOSAL
As fiscal adjustment is likely to have implications for intra-EU current accounts and changes in relative competitiveness, this should be factored in when fiscal recommendations are formulated (for instance, adjustment recommendations should be toned down in case they may increase an already oversized current account surplus vis-à-vis other Euro member states).
This would strengthen the EU’s macroeconomic surveillance process that today is not robust enough and insufficiently focused on the problem of creditor / debtor status that euro countries build vis-à-vis each other.
Replace most deficit based rules with a spending rule and adopt countryspecific, medium term debt targets.
ADVANTAGE
PROPOSAL
Exclude some investment in public goods from the spending rule, despite the undeniable risks and challenges.
While this proposal may open the door to moral hazard, we note that a public investment strategy needs to overcome many more obstacles than just those of its financing (notably bureaucratic and political decision and implementation challenges). Spending rule exemption clauses could be tied to supply-side reform commitments and be dependent on the magnitude of investment schemes financed at the EU level. There could be the possibility of a privileged access to those EU funds for fiscally compliant countries.
Due to its different implications for the future (as public capital formation should lead to higher output and taxes over the long term), there is a strong case that investment spending should be treated differently from current spending.
PROPOSAL
ADVANTAGE
Strengthen control and governance by giving more powers to Independent Fiscal Institutions (IFI).
This proposal would overcome the weaknesses of the current sanction process that is considered counterproductive, as sanctions would hit countries likely to already be in a dire economic and financial state, exacerbating the risk of extreme politicisation of the topic.
There is room to give more teeth (including the power to reject the budget, at least temporarily) to Independent Fiscal Institutions supervised by an EU institution that would define common methods and process. Giving the European Court of Justice jurisdiction over breaches of fiscal rules (which is not currently the case, but has been proposed) is probably not appropriate, as, given the potential of many international spill overs of a sovereign default, an intragovernmental process should retain the final word.
ADVANTAGE
PROPOSAL
Explore the possibility of a two-tier debt system and of an orderly sovereign default process.
A “blue debt / red debt” system would create an ex-ante, built in and non-politicised de facto sanction system. The non-compliant country would have to pay higher interest rates yet to be determined by the market and with no ex-post decision by the EU.
The debt issued by a country in accordance with EU rules (essentially the debt up to 60% of GDP) would be senior (possibly with some guarantees from the rest of the EU) while the excess debt would be junior. To maintain the sanction principle, the junior debt would be ineligible to ECB QE operations and disincentives should help to minimise its holding by the banking system. An orderly sovereign default process would also need to be set up (only for the junior debt).
ADVANTAGE
PROPOSAL
The fiscal and macroeconomic
surveillance processes should be brought closer together.
This would strengthen the EU’s macroeconomic surveillance process that today is not robust enough and insufficiently focused on the problem of creditor / debtor status that euro countries build vis-à-vis each other.
As fiscal adjustment is likely to have implications for intra-EU current accounts and changes in relative competitiveness, this should be factored in when fiscal recommendations are formulated (for instance, adjustment recommendations should be toned down in case they may increase an already oversized current account surplus vis-à-vis other Euro member states).
Exclude some investment in public goods from the spending rule, despite the undeniable risks and challenges.
Strengthen control and governance by
giving more powers to Independent Fiscal Institutions (IFI).
The fiscal and macroeconomic
surveillance processes should be brought closer together.
Explore the possibility of a two-tier debt system and of an orderly sovereign default process.
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