Proposals for a reform of the EU’s fiscal rules and economic governance

Sebastian Dullien, Christoph Peatz (), Andrew Watt () and Sebastian Watzka ()
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Christoph Peatz: Macroeconomic Policy Institute (IMK)
Andrew Watt: Macroeconomic Policy Institute (IMK)
Sebastian Watzka: Macroeconomic Policy Institute (IMK)

No 159e-2020, IMK Report from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Debt-to-GDP ratios are set to rise significantly all over the world as a result of the coronavirus crisis. This will pose a huge challenge for the EU’s member states and in particular the euro area countries, because of the strict fiscal rules that apply to them. In a consultation process that began earlier this year, the European Commission is inviting proposals for reforms to the rules. The IMK advocates a reform focused on appropriate fiscal rules that promote short-term macroeconomic stabilisation and the long-term modernisation of the public capital stock, while still keeping the sustainability of public debt in mind. We propose an expenditure rule for non-cyclical, non-investment expenditure coupled with a Golden Rule for public investment. As a pragmatic solution, the permissible debt-to-GDP ratio should be increased to 90%, while escape clauses should apply during times of crisis. The proposed rules should replace the EU’s current fiscal rules. The Macroeconomic Imbalance Procedure should also be reformed at the same time. As a key part of such a reform, we advocate the establishment of a Macroeconomic Dialogue in order to ensure compliance with the reformed rules and consistency of the national strategies.

Pages: 28 pages
Date: 2020
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