The Reform of the European Fiscal Rules: An Analytical Framework

Marco Buti and Marcello Messori

No 19627, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In April 2024, the European institutions agreed on a new set of fiscal rules that are now being implemented. We develop a simple model to compare the old Stability and Growth Pact and the newly reformed fiscal framework. We model the implementation of the rules as a game between a high-debt country and the European Commission. A main feature of the model is that, whilst under the old fiscal rules the objectives of growth and stabilisation were outside the institutional setting and hence needed to be introduced externally by making the rules more flexible, under the new rules the goal of boosting growth is built into the framework, and it is pursued via promoting reforms and investment. This implies that the incentives to comply with the rules are higher under the new rules. Should nonetheless the Member state renege on its commitments, the Commission would have a much stronger legitimacy to tighten the implementation of the rules by withdrawing the more gradual fiscal adjustment granted to the national authorities in exchange for reforms and investment.

Date: 2024-10
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