IDEAS home Printed from https://ideas.repec.org/p/imk/studie/72-2021.html
   My bibliography  Save this paper

Reforming the Fiscal Rulebook for the Euro Area – and the Challenge of Old and New Public Debt

Author

Listed:
  • Jan Priewe

Abstract

Upholding the EU fiscal rules at the elevated public debt level due to the Corona crisis would trigger a phase of long-standing austerity in the euro area. In this study, major proposals for reforms are reviewed, with a critical focus on the expenditure rule, which is central in many think-tanks’ and academic researchers’ advice. A different reform based on a fiscal analogue to the well-known Taylor-rule for monetary policy is designed here. It is argued that under a low-interest environment growth rates exceed interest rates, a fact not compatible with the present ruleset and with far-reaching consequences. This requires redefining debt sustainability. The proposal chooses as the operational variable for fiscal policy primary balances rather than structural balances. The anchor for fiscal stability, until know the 60% cap on public debt, should be replaced by a cap on the interest payments on public debt at roughly 3% of GDP. This allows higher fiscal space for investment and innovations. The fact that the interest rate burden of all Member States in the euro area stands at the lowest level ever experienced, although the debt level is at an all-time high, clarifies that the focus on the debt ratio is misleading. Change could be possible in the secondary law of the EU without change of the Treaties.

Suggested Citation

  • Jan Priewe, 2021. "Reforming the Fiscal Rulebook for the Euro Area – and the Challenge of Old and New Public Debt," IMK Studies 72-2021, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:studie:72-2021
    as

    Download full text from publisher

    File URL: http://www.boeckler.de/pdf/p_imk_study_72_2021.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 495-525, National Bureau of Economic Research, Inc.
    2. Nickel, Christiane & Rother, Philipp & Zimmermann, Lilli, 2010. "Major public debt reductions: Lessons from the past, lessons for the future," Working Paper Series 1241, European Central Bank.
    3. Blyth, Mark, 2015. "Austerity: The History of a Dangerous Idea," OUP Catalogue, Oxford University Press, number 9780199389445.
    4. Helge Berger & Giovanni Dell’Ariccia & Maurice Obstfeld, 2019. "Revisiting the Economic Case for Fiscal Union in the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 657-683, September.
    5. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    6. Barry Eichengreen & Asmaa El-Ganainy & Rui Esteves & Kris James Mitchener, 2019. "Public Debt Through the Ages," NBER Working Papers 25494, National Bureau of Economic Research, Inc.
    7. Nathaniel G Arnold & Bergljot B Barkbu & H. Elif Ture & Hou Wang & Jiaxiong Yao, 2018. "A Central Fiscal Stabilization Capacity for the Euro Area," IMF Staff Discussion Notes 18/03, International Monetary Fund.
    8. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122, National Bureau of Economic Research, Inc.
    9. Jonathan David Ostry & Atish R. Ghosh & Raphael A Espinoza, 2015. "When Should Public Debt Be Reduced?," IMF Staff Discussion Notes 15/10, International Monetary Fund.
    10. Mr. Nathaniel G Arnold & Ms. Bergljot B Barkbu & H. Elif Ture & Hou Wang & Jiaxiong Yao, 2018. "A Central Fiscal Stabilization Capacity for the Euro Area," IMF Staff Discussion Notes 2018/003, International Monetary Fund.
    11. Francesco Chiacchio & Grégory Claeys & Francesco Papadia, 2018. "Should we care about central bank profits?," Policy Contributions 27096, Bruegel.
    12. Philipp Heimberger & Jakob Kapeller, 2017. "The performativity of potential output: pro-cyclicality and path dependency in coordinating European fiscal policies," Review of International Political Economy, Taylor & Francis Journals, vol. 24(5), pages 904-928, September.
    13. Luc Eyraud & Xavier Debrun & Andrew Hodge & Victor Duarte Lledo & Catherine A Pattillo, 2018. "Second-Generation Fiscal Rules; Balancing Simplicity, Flexibility, and Enforceability," IMF Staff Discussion Notes 18/04, International Monetary Fund.
    14. Kamps, Christophe & Leiner-Killinger, Nadine, 2019. "Taking stock of the functioning of the EU fiscal rules and options for reform," Occasional Paper Series 231, European Central Bank.
    15. Nicolas Carnot & Magdalena Kizior & Gilles Mourre, 2017. "Fiscal stabilisation in the Euro-Area: A simulation exercise," Working Papers CEB 17-025, ULB -- Universite Libre de Bruxelles.
    16. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
    17. Carl-Ludwig Holtfrerich, 2015. "Staatsschulden: Ursachen, Wirkungen und Grenzen," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 95(8), pages 529-533, August.
    18. Emanuele Baldacci & Sanjeev Gupta & Carlos Mulas-Granados, 2012. "Reassessing the fiscal mix for successful debt reduction [A historical public debt database]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 27(71), pages 365-406.
    19. Christofzik, Désirée & Feld, Lars P. & Reuter, Wolf Heinrich & Yeter, Mustafa, 2018. "Uniting European fiscal rules: How to strenghten the fiscal framework," Working Papers 04/2018, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    20. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    21. Zsolt Darvas & Philippe Martin & Xavier Ragot, 2018. "European fiscal rules require a major overhaul," Policy Contributions 27957, Bruegel.
    22. Barry Eichengreen & Ugo Panizza, 2016. "A surplus of ambition: can Europe rely on large primary surpluses to solve its debt problem?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(85), pages 5-49.
    23. Grégory Claeys & Zsolt Darvas & Alvaro Leandro, 2016. "A proposal to revive the European Fiscal Framework," Policy Contributions 13490, Bruegel.
    24. Mr. Luc Eyraud & Mr. Tao Wu, 2015. "Playing by the Rules: Reforming Fiscal Governance in Europe," IMF Working Papers 2015/067, International Monetary Fund.
    25. Jan Priewe, 2020. "Why 60 and 3 percent? European debt and deficit rules - critique and alternatives," IMK Studies 66-2020, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    26. Mr. Jonathan David Ostry & Mr. Atish R. Ghosh & Mr. Raphael A Espinoza, 2015. "When Should Public Debt Be Reduced?," IMF Staff Discussion Notes 2015/010, International Monetary Fund.
    27. Mr. Luc Eyraud & Mr. Xavier Debrun & Andrew Hodge & Victor Duarte Lledo & Ms. Catherine A Pattillo, 2018. "Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability," IMF Staff Discussion Notes 2018/004, International Monetary Fund.
    28. Christian Breuer, 2019. "State Expansionary Austerity and Reverse Causality: A Critique of the Conventional Approach," Working Papers Series 98, Institute for New Economic Thinking.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Catherine Mathieu & Henri Sterdyniak, 2021. "Vers une réforme des règles budgétaires dans la zone euro ?," SciencePo Working papers Main hal-03474871, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ginters Buss & Patrick Gruning & Olegs Tkacevs, 2021. "Choosing the European Fiscal Rule," Working Papers 2021/03, Latvijas Banka.
    2. Luc Eyraud & Xavier Debrun & Andrew Hodge & Victor Duarte Lledo & Catherine A Pattillo, 2018. "Second-Generation Fiscal Rules; Balancing Simplicity, Flexibility, and Enforceability," IMF Staff Discussion Notes 18/04, International Monetary Fund.
    3. Sascha Buetzer, 2022. "Advancing the Monetary Policy Toolkit through Outright Transfers," IMF Working Papers 2022/087, International Monetary Fund.
    4. Julia del Amo Valor & Marcos Martín Mateos & Diego Martínez López & Javier J. Pérez, 2023. "Is the European economic governance framework too “complex”? A critical discussion," Working Papers 2023-06, FEDEA.
    5. Francesco Spadafora, 2019. "European integration in the time of mistrust," Questioni di Economia e Finanza (Occasional Papers) 512, Bank of Italy, Economic Research and International Relations Area.
    6. Mihaela Onofrei & Tudorel Toader & Anca Florentina Vatamanu & Florin Oprea, 2021. "Impact of Governments’ Fiscal Behaviors on Public Finance Sustainability: A Comparative Study," Sustainability, MDPI, vol. 13(7), pages 1-16, March.
    7. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    8. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20 [Dealing with Structural Change. Annual Report 2019/20]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920.
    9. Olga Francová & Ermal Hitaj & John Goossen & Robert Kraemer & Andreja Lenarčič & Georgios Palaiodimos, 2021. "EU fiscal rules: reform considerations," Discussion Papers 17, European Stability Mechanism, revised 25 Oct 2021.
    10. Beetsma, Roel & Cimadomo, Jacopo & van Spronsen, Josha, 2022. "One scheme fits all: a central fiscal capacity for the EMU targeting eurozone, national and regional shocks," Working Paper Series 2666, European Central Bank.
    11. Larch, Martin & Orseau, Eloïse & van der Wielen, Wouter, 2021. "Do EU fiscal rules support or hinder counter-cyclical fiscal policy?," Journal of International Money and Finance, Elsevier, vol. 112(C).
    12. Beetsma, Roel & Burgoon, Brian & Nicoli, Francesco, 2023. "Is european attachment sufficiently strong to support an EU fiscal capacity: Evidence from a conjoint experiment," European Journal of Political Economy, Elsevier, vol. 78(C).
    13. Clemens Fuest & Klaus Gründler & Niklas Potrafke & Marcel Fratzscher & Alexander Kriwoluzky & Claus Michelsen & Michael Hüther & Peter Bofinger & Lars P. Feld & Wolf Heinrich Reuter, 2019. "Schuldenbremse — Investitionshemmnis oder Vorbild für Europa? [Debt Brake — Investment Barrier or Role Model for Europe?]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 99(5), pages 307-329, May.
    14. Kamps, Christophe & Leiner-Killinger, Nadine, 2019. "Taking stock of the functioning of the EU fiscal rules and options for reform," Occasional Paper Series 231, European Central Bank.
    15. M. Ayhan Kose & Franziska Ohnsorge & Naotaka Sugawara, 2020. "Benefits and Costs of Debt: The Dose Makes the Poison," Koç University-TUSIAD Economic Research Forum Working Papers 2006, Koc University-TUSIAD Economic Research Forum.
    16. Maria Manuel Campos & Cristina Checherita-Westphal, 2019. "Economic consequences of high public debt and challenges ahead for the euro area," Working Papers o201904, Banco de Portugal, Economics and Research Department.
    17. Canofari, Paolo & Piergallini, Alessandro & Piersanti, Giovanni, 2020. "The Fallacy Of Fiscal Discipline," Macroeconomic Dynamics, Cambridge University Press, vol. 24(1), pages 55-68, January.
    18. Nicoletta Batini & Francesco Lamperti & Andrea Roventini, 2020. "Reducing risk while sharing it: a fiscal recipe for the EU at the time of COVID-19," SciencePo Working papers Main hal-04090084, HAL.
    19. Panizza, Ugo & Fatás, Antonio & Ghosh, Atish R. & ,, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    20. Cezara Vinturis, 2023. "How do fiscal rules shape governments' spending behavior?," Economic Inquiry, Western Economic Association International, vol. 61(2), pages 322-341, April.

    More about this item

    Keywords

    Fiscal rules; public debt; deficit bias; austerity; fiscal policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imk:studie:72-2021. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sabine Nemitz (email available below). General contact details of provider: https://edirc.repec.org/data/imkhbde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.