Independent Fiscal Institutions in the European Union: Is Coordination Required?

Increased reliance on national frameworks to improve compliance with EU standards of fiscal soundness calls for coordination among EU member states. We focus on the rationale and forms of coordination among national independent fiscal institutions (IFIs). IFIs aim at strengthening governments’ incentives to adhere to national fiscal rules mainly through monitoring activities that provide non-partisan information on the conduct of fiscal policy to all stakeholders in the budget process. Such activities increase the costs of inadequate policies in terms of reputation loss, financing conditions, and electoral sanctions. The case for coordination is two-pronged. First, national IFIs are not all born equal, with questions remaining as to how some of them can effectively play their role. Accepting too many weak IFIs would undermine the aim of recent reforms to strengthen rules-based fiscal policy and bolster the stability of the euro area. Second, as national IFIs and the European Commission (EC) both monitor fiscal policies, disagreements could lead to cacophony and weaken IFIs’ impact on the public debate about fiscal policy. Thus, coordination should aim at (i) ensuring that all national IFIs converge to international best practice in their operations and (ii) mitigating the risk of cacophony in fiscal surveillance. To preserve national IFIs independence, coordination—both between the EC and IFIs and among the latter—should be limited to information exchanges and peer-pressure-through-emulation. A beefed-up European Fiscal Board would have a key role to play in facilitating such coordination.