Report

Five proposals for enforceable EU fiscal rules

This report from UK think tank the Centre for European Reform looks at the need for reform of the EU’s fiscal rules. 

The EU’s fiscal rules, which constrain member-states’ budget policies, are in desperate need of reform. They are too complicated, impose unrealistic demands on some countries, and lead to government overspending in economic booms and underspending in recessions. Member-states have only met the rules around half the time they were in force. After suspending the rules in the wake of the pandemic, the European Commission recently proposed that hard-coded rules applied to all member-states should be replaced with multi-year debt-reduction plans, which would be individually negotiated with each member-state. It offered a way to reconcile debt sustainability with fiscal support during recessions and room for public investment. But frugal member-states, led by Germany, worry that the Commission would use its discretion to be soft on high-debt countries and want to maintain numerical debt reduction targets that are not tailored to individual countries. The CER policy brief, ‘Five proposals for enforceable fiscal rules’, explains why the history of EU fiscal rule enforcement shows this is a mistake. The same rigid rules cannot be imposed on a ‘one size fits all’ basis because economic and political circumstances differ between countries, and Europe’s growth and inflation regime changes over time. Constraining member-states during recessions would only tempt them to once again lobby the European Commission to weaken enforcement. The Commission needs discretion to agree debt reduction plans with member-states in a way that ensures that budget policy keeps pace with economic developments and can address critical EU challenges like climate change or military defense. But the Commission cannot ask member-states to trust it blindly on enforcement. The policy brief proposes a way out of the dilemma: coupling Commission discretion with stronger enforcement mechanisms to get member-states to follow debt reduction plans. The proposals of both the Commission and the German government fell short on enforcement.