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The future of European fiscal governance: a comprehensive approach

Author

Listed:
  • Marzia Romanelli

    (Bank of Italy)

  • Pietro Tommasino

    (Bank of Italy)

  • Emilio VadalÃ

    (Bank of Italy)

Abstract

We review the general reasons for limiting the discretion of national fiscal policies in the context of a monetary union and, on this basis, we assess the shortcomings of the current Euro area fiscal framework as well as the merits of the main proposals for its reform. Taking into account the elements of consensus that emerged in the debate, we outline a possible revision of the European fiscal rules. The framework we propose aims at public debt sustainability – focusing on those policies which are clearly harmful to member countries – and it is simple and transparent – avoiding the use of unobservable variables. The new framework would be based on a medium-term debt target and a multi-annual headline deficit profile consistent with that target. The new rules should be complemented with a common fiscal capacity, to compensate for the loss of policy discretion at the national level and to internalize cross-country fiscal spillovers. In particular, we suggest introducing a "contingent" facility, which would be activated in cases specified ex ante or for the realization of common projects of exceptional nature (such as the green transition).

Suggested Citation

  • Marzia Romanelli & Pietro Tommasino & Emilio VadalÃ, 2022. "The future of European fiscal governance: a comprehensive approach," Questioni di Economia e Finanza (Occasional Papers) 691, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_691_22
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2022-0691/QEF_691_22.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    fiscal policy rules; fiscal policy; euro area; fiscal federalism; fiscal union;
    All these keywords.

    JEL classification:

    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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