EU’s Fiscal Framework - identified shortcomings and proposed remedies

Fiscal rules seek to limit the tendency of governments to run deficits, to steer them towards countercyclical and sustainable long-term fiscal policy. In a monetary union, a sovereign debt crisis caused by over-indebtedness of a member state can cause negative externalities to other member states. EU fiscal rules aim at containing these debt-related externalities by ensuring debt sustainability in each member country. The creation of effective but contingent common fiscal rules in Europe has proved to be a difficult task. The result is a complex framework that does not guide Member State’s fiscal policy as intended. Experts supporting reform emphasize debt sustainability instead of thresholds to be reached within a certain time frame, country-specificity, expenditure ceilings, that rely on an observable indicator, as the main operational rule and a greater role for national independent fiscal institutions. In addition to these improvements, the Commission’s orientations of November 2022 outline a new process, where each Member State would negotiate its own 4-year fiscal-structural plan with the Commission. New sanctions and stricter enforcement are foreseen to improve political commitment. While the framework would be simpler, the increasing country specificity would lead to more fragmented fiscal policy in Europe and would be a move away from fiscal rules towards standards. An important implication for the national framework is related to the bilateral negotiations, which would require a clear vision of the fiscal and structural policies the Government would be committing to for the following four years.nonPeerReviewe