Research Briefing | Apr 26, 2021

Eurozone | What’s next for the EU’s fiscal framework

Since the start of the pandemic, eurozone countries have been able to relax fiscal policy without worrying about the eurozone’s fiscal rules. But what will happen when the rules are reinstated, most likely in 2023, isn’t clear.

Clearly, a rethinking of the fiscal rules is necessary, as applying the current fiscal framework to the future much different economic landscape would very likely result in long-lasting policy mistakes. While 2023 seems distant, uncertainty about the fiscal framework and the individual responses national governments are taking could dent the post-Covid recovery and increase divergence among eurozone economies.

Following copious changes over the last two decades, the EU’s current fiscal rules are complex and opaque. And while they probably worked in containing budgetary imbalances, they were sub-optimal in producing the right fiscal stance for specific economic conditions, particularly the global financial and sovereign debt crises.

The future framework will need to serve two new purposes: reducing overreliance on ECB support and accelerating the process toward a fiscal union. Current proposals being put forward do aim to reduce complexity and apply some incentives to avoid repeating previous policy mistakes that led governments to cut investment too sharply to comply with fiscal austerity.

But with national elections in Germany this year and France in 2022, political developments will increasingly dominate discussions. Other factors, such as intractably low interest rates and the EU’s Next Generation plan, will also be important in a debate that is likely to be critical for the future of the eurozone.

 

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