European Commission Crafts Plan To Reform EU Fiscal Rules

The European Commission has presented its vision for revamping the European Union (EU) framework to guide members on their fiscal policies amid the COVID-19 crisis and Russia’s invasion of Ukraine, three economic analysts wrote for the Peterson International Institute for International Economics (PIIE) earlier this month.

Photo Insert: The commission could have taken the path of incremental reform, as in previous rounds in 2005, 2011, 2013, and 2015. It did not, and the result is welcome and far-reaching.

The commission could have taken the path of incremental reform, as in previous rounds in 2005, 2011, 2013, and 2015. It did not, and the result is welcome and far-reaching.

But the proposals unveiled on November 9 also contained many shortcomings that can and should be addressed, Olivier Blanchard, André Sapir and Jeromin Zettelmeyer wrote.

The core proposal is to replace the current “preventive arm” of the Stability and Growth Pact (SGP), which member states originally adopted in the 1990s. The SGP has become a confusing thicket of rules that attempts to map debt and deficit levels into adjustment requirements.

The plan is to replace this with a medium-term adjustment plan guided by debt sustainability analysis (DSA).

The requirements for countries to keep debt within 60 percent of GDP and deficits within 3 percent of GDP would be maintained—hence avoiding the need to change the excessive deficit procedure (EDP) protocol annexed to the EU treaty—but they would be embedded into an entirely new framework.

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