Another Quiet Revolution?

There seems to be a fair degree of consensus that synergies between fiscal rules and independent fiscal institutions can be more effective in fighting the deficit bias or to follow more closely optimal policies. More and more fiscal councils are being created each year, especially in the European Union, where important changes to the basic fiscal architecture shook up the whole institutional set-up. Several amendments to the Stability and Growth Pact together with the adoption of the Fiscal Compact made the existence of functionally independent bodies a legal requirement. Although the parallels between the delegation of monetary policy to independent central banks and creation of fiscal councils are far from perfect, we may well be witnessing another “quiet revolution”, the term coined by Alan Blinder in his book about important changes in central banking in last decades. In this paper we argue that in order to complete the revolution, further changes to the European fiscal framework are necessary to eliminate the sometimes deep inconsistencies that might occur between various fiscal rules, monitoring procedures and communication of basic policy messages. We propose a new institutional framework, where national and supranational responsibilities are separated and the first line of defense against the deficit bias is at the national level. In this model, the community level would be responsible for checking compliance with minimum standards defined for local fiscal frameworks and for EU-wide coordination of policies instead of yearly fine-tuning of national budgets