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Taking stock of the functioning of the EU fiscal rules and options for reform

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  • Kamps, Christophe
  • Leiner-Killinger, Nadine

Abstract

This paper reviews developments in fiscal rules in the European Union (EU) from the entering into force of the Treaty on European Union (the “Maastricht Treaty”), which laid the foundations for the euro, until today. It seems safe to say that fiscal positions in the EU and the euro area are now more favourable than they would have been in the absence of the Maastricht Treaty and the Stability and Growth Pact (SGP). However, the aggregate picture masks significant cross-country heterogeneity, with less progress where it would be needed most. Furthermore, the design of the rules has not always followed economic logic and has often been the product of political constraints, giving rise to some flaws in the framework from the outset. Repeated attempts to adjust the fiscal framework to a multitude of circumstances over the past 25 years have made it overly complex and incoherent. The paper concludes that, in its current shape, the SGP is an insufficient disciplining device in economic good times, with the consequence that there are no fiscal buffers, particularly in high-debt countries, to support growth in economic troughs. This, together with the absence of a central fiscal stabilisation instrument, puts the burden of stabilisation mostly on the single monetary policy. The paper also reviews reform options on how to render the fiscal framework more effective in bringing about sounder public finances and avoiding the procyclicality observed over the past two decades. JEL Classification: H11, H50, H6

Suggested Citation

  • 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.
  • Handle: RePEc:ecb:ecbops:2019231
    Note: 491621
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecb.op231~c1ccf67bb3.en.pdf
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    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. Dell'Ariccia, Giovanni & Ferreira, Caio & Jenkinson, Nigel & Laeven, Luc & Martin, Alberto & Minoiu, Camelia & Popov, Alexander, 2018. "Managing the sovereign-bank nexus," Working Paper Series 2177, European Central Bank.
    3. 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.
    4. Joan Paredes & Diego J. Pedregal & Javier J. Pérez, 2009. "A quarterly fiscal database for the euro area based on intra-annual fiscal information," Working Papers 0935, Banco de España;Working Papers Homepage.
    5. Dell'Ariccia, Giovanni & Ferreira, Caio & Jenkinson, Nigel & Laeven, Luc & Martin, Alberto & Minoiu, Camelia & Popov, Alexander, 2018. "Managing the sovereign-bank nexus," Working Paper Series 2177, European Central Bank.
    6. Christophe Kamps & Jacopo Cimadomo & Sebastian Hauptmeier & Nadine Leiner-Killinger, 2017. "Reflections on the Euro Area Fiscal Stance," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 52(3), pages 125-131, May.
    7. 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.
    8. Glenn Follette & Byron F. Lutz, 2012. "Fiscal rules, what does the American experience tell us?," Finance and Economics Discussion Series 2012-38, Board of Governors of the Federal Reserve System (U.S.).
    9. Luc Eyraud & Tao Wu, 2015. "Playing by the Rules; Reforming Fiscal Governance in Europe," IMF Working Papers 15/67, International Monetary Fund.
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    Cited by:

    1. Hauptmeier, Sebastian & Kamps, Christophe, 2020. "Debt rule design in theory and practice: the SGP’s debt benchmark revisited," Working Paper Series 2379, European Central Bank.

    More about this item

    Keywords

    Economic and Monetary Union (EMU); fiscal rules; Stability and Growth Pact (SGP);

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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