Why 60 and 3 percent? European debt and deficit rules - critique and alternatives

Jan Priewe

No 66-2020, IMK Studies from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: The 60 percent debt cap and the 3 percent deficit cap, enshrined in the EU Treaties since 1992, are cornerstones of the complex fiscal policy framework of the Euro area. Both numbers came into the Maastricht Treaty more or less by coincidence. There is no sound economic justification for the caps, in particular for the 60 percent debt cap if combined with the 3 percent deficit limit. The taboo of not questioning them in debates about reforming the EU fiscal framework prevents innovative thinking. We analyse attempts to explain or justify both caps by the EU Commission and compare them with other propositions from the IMF and in academia. The rules entail a bias for contractionary policy, thus dampening growth and employment, especially since the Fiscal Compact (2011). This becomes best visible if the debt and deficit dynamics in the EMU are compared with the U.S. The paper pleads for a thorough reconsideration of the EU fiscal policy rulebook in face of a fundamental change in the relationship of interest and growth rates, a key determinant of public debt. The deficit rule should allow for a more effective counter-cyclicality and for more fiscal space for public investment. Furthermore, high-debt countries in EMU should have the option to carry their legacy debt over a longer period to avoid growth-dampening austerity.

JEL-codes: E43 E62 H62 H63 (search for similar items in EconPapers)
Pages: 95 pages
Date: 2020
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:imk:studie:66-2020

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