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EU fiscal rules: reform will not ensure sustainable finances

Reform of the European fiscal rules

Consultant report

The EU fiscal rules are expected to ensure the sustainability of public finances in the Member States of the European Union (EU). The European Commission (Commission) submitted a proposal for the reform of the fiscal rules. We are critical of this proposal and therefore addressed an advisory report including clear recommendations to the parliamentary Budget Committee.

The Maastricht criteria, the core of the fiscal rules, provide for two reference values to ensure the sustainability of the Member States’ public finances:

  • the deficit criterion, i.e. a Member State may only have a budget deficit of a maximum of 3 per cent of gross domestic product (GDP) within a year; and
  • the debt criterion, i.e. a Member State’s debts may not exceed 60 per cent of GDP.

The following applies: If the debt-to-GDP ratio exceeds the reference value of 60 per cent, a Member State has to ensure that the ratio is on a firm downward path and approaches the reference value at a satisfactory pace.

Proposal for reform does not ensure compliance with Maastricht criteria

The Commission’s proposal for reform does not provide for a change of the Maastricht criteria. However, the planned framework does not ensure that the Member States will actually comply with the reference values in the medium to long term. In detail:

  • If a Member State’s debt level is too high, the Commission is to bilaterally negotiate with this Member State on a net expenditure path, which defines the annual upper limit for the nationally financed net primary expenditure. If the Member State complies with the net expenditure path, this is expected to lead to reduced debts.
  • The new framework, however, does not ensure that excessive debts are reduced in a quick and sustainable manner since quantitative minimum requirements are lacking.
  • In addition, the Commission relies on the primary balance when determining net expenditure. This means that the interest payments on the high debts, which have already been incurred, are excluded. Since the debt service is to be financed from the current budget, these payments deteriorate the balance between revenue and expenditure. It would be better to rely on the structural balance as this balance already takes the interest payments into account.
  • Furthermore, the net expenditure path should specify a safety margin for economic fluctuations to ensure that the budget deficit will not be too high even in weaker years for the economy.
  • The Commission still has broad scope for free interpretation and discretion in the excessive deficit procedure. Therefore, we cannot assume that the fiscal rules will be better enforced than before.

In summary: Should the proposal for reform be adopted in this form, the Maastricht criteria and thus also the principles and objectives of primary law could be undermined.

Binding requirements for budget consolidation needed

We consider it to be necessary that binding requirements be included in the reform. The requirements should be ambitious enough to achieve a reduction of excessive debts to the reference value within a reasonable period of time. This is the only way to avoid that the reduction of debts reaches too far into the future and burdens the generation after next.

An infographic shows that the eeduction of dept-to-GDP ratio to 60 per cent is not always ensured

In principle, the Federal Government concurs with our economic assessments with regard to content. Nevertheless, the German Bundestag (Parliament) should provide the Government with guiding principles in line with our recommendations in order to make its intention clear and to strengthen the Government’s position for the pending negotiations at EU level.

For more information on the reform of the EU fiscal rules and our recommendations, please see our report to the parliamentary Budget Committee:

Downloads

Advisory report

  • Reform of the European fiscal rules PDF, 609 KB Download
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