The Risks of Adopting the Bond Yield as the Anchor for the EU Fiscal Framework

Fredrik Andersson and Lars Jonung ()

No 2022:1, Working Papers from Lund University, Department of Economics

Abstract: The EU’s fiscal rules, set out in the Maastricht Treaty of 1993 and the Stability and Growth Pact of 1997, are anchored to GDP. The debt ceiling and the deficit threshold are set to 60 percent and 3 percent of GDP, respectively. Recently, prominent economists and policymakers, have argued that that the debt ceiling should be raised due to falling bond yields. By extension, this argument suggests a shift from GDP anchoring to bond yield anchoring of the EU fiscal framework. We discuss the risks of basing the fiscal rules on the bond yield rather than on the GDP. While such a change would provide short-run relief to highly indebted EU member states, it implies high long-run risks to fiscal sustainability should bond yields rise in the future. We conclude that GDP serves as a better anchor for the EU fiscal framework than the bond rate under present circumstances.

Keywords: Fiscal framework; European Union; ECB; Stability and Growth Pact; secular stagnation; modern monetary theory; government debt; fiscal policy (search for similar items in EconPapers)
JEL-codes: E50 E60 H60 N10 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2022-01-19
New Economics Papers: this item is included in nep-eec, nep-his and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:lunewp:2022_001

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