The Covid-19 crisis has shown the costs inherent in the absence of a “ permanent” central fiscal capacity, capable of being rapidly deployed to deal with an exogenous macroeconomic shock, the European Fiscal Board said, on Tuesday 20 October, when presenting its annual report for 2020.
According to the Board, this fiscal capacity should ultimately take the form of a “larger budget for the European Union, financed by own tax revenues, with the capacity to borrow and focusing on European investment priorities”.
Currently being negotiated by the EU Council and the European Parliament, the Next Generation EU recovery plan, which will complement the Multiannual Financial Framework (MFF) 2021-2027 for 4 years, will play this role of fiscal capacity at EU level. The President of the European Fiscal Board, Niels Thygesen, described the package presented as an innovative initiative in terms of both its size and its modalities. The European Commission will borrow cheaply on the markets on behalf of the EU27 to transfer grants, or even loans, to the Member States depending on the socio-economic impact of the pandemic.
We know that the European Recovery Plan is a “ temporary “ feature, but it would be nice to have it “for much longer”, said Mateusz Szczurek, former Polish Finance Minister and member of the European Fiscal Board, at a briefing with some journalists.
The day before, in an interview with the Le Monde newspaper, ECB President Christine Lagarde also mentioned the hypothesis of keeping this fiscal capacity in the toolbox of instruments that can be mobilised in future exceptional circumstances.
The European Fiscal Board also reiterated its support for the activation of the escape clause of the Stability and Growth Pact to allow Member States to commit expenditure related to the fight against the coronavirus (see EUROPE 12518/18). The temporary freeze on European fiscal rules, also set for 2021, is an opportunity to be seized quickly to reflect on the type of rules that Member States will have to respect once the pandemic is over.
Reviewing the public debt reduction path
Thus, the Board's economists are of the opinion that the sharp increase in public debt caused by the fight against Covid-19 underlines the need to define public debt reduction trajectories that are “realistic and adapted to the specificity of the Member States”, all the while maintaining a numerical target.
On the more general debate on the revision of the Pact, the Board advocates a recasting based on three principles: - maintaining a maximum target for public debt (a debt anchor); - an expenditure rule that determines credible paces for the consolidation of public finances; - a general escape clause of the Stability Pact.
Compliance with the future fiscal rules should be “a precondition” for access to central fiscal capacity, the European Fiscal Board says.
See the annual report: https://bit.ly/34eOt8A (Original version in French by Mathieu Bion)