In its annual report presented on Wednesday 10 November, the European Fiscal Board recommends limiting the political wiggle room surrounding the Stability and Growth Pact’s general escape clause by streamlining its activation, maintenance and deactivation procedure.
The activation of the general escape clause in the spring of 2020 (see EUROPE 12452/1) was justified in order to deal with the health emergency caused by the Covid-19 pandemic, the Board believes. “However, its implementation revealed shortcomings that are representative of the more general design and governance shortcomings of the Stability and Growth Pact”, it says in its annual report.
According to experts, this unprecedented decision by the European Finance Ministers led to a de facto freeze in European fiscal rules. And the renewal of the Pact’s escape clause in spring 2021 and its scheduled deactivation at the end of 2022 leave too much room for political manoeuvring, although the Pact clearly defines what constitutes a severe economic downturn.
The high degree of political discretion raises “concerns” about the medium-term path of public finances, the Board says. These concerns are twofold: elected officials, independent fiscal authorities, and financial markets do not know when and how the EU will reapply the rules. And some countries have taken permanent fiscal decisions in response to the health and economic crisis without specifying how they will finance them.
As the reflection on the revision of the European economic governance framework was relaunched in mid-October, the European Fiscal Board recommends clarifying certain basic principles to rationalise the use of the general escape clause, including: - limiting its activation to truly exceptional circumstances; - linking its activation and deactivation to an independent economic analysis; - identifying the competent entity to activate the escape clause, monitor its application, and deactivate it; - defining the process leading to a restoration of the rules applicable in normal times.
Finally, the Board reiterated its position on the future of European fiscal rules (see EUROPE 12585/22, 12360/5). “The future focus should be on one primary objective, a long-run anchor for public debt, with one main operational rule - an expenditure benchmark - to target a gradual reduction of the debt ratio towards the anchor at a pace tailored to country circumstances”, argued Niels Thygesen, chairman of the Board.
See the Board’s report: https://bit.ly/3HqqvIQ (Original version in French by Mathieu Bion)