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Reforming the Stability and Growth Pact: Striving for sustainability while offering room for manoeuvre

Author(s): Karsten Wendorff

Date published: Nov 2019

SUERF Policy Note, Issue No 111
by Karsten Wendorff, Deutsche Bundesbank


JEL-codes: E62, H60, H63.
Keywords: Stability- and Growth Pact, fiscal rule, Golden Rule, EU institutions, Rainy Day Fund, expenditure rule, debt sustainability, structural balance budget.

The European fiscal rules are criticised on the one hand for the lack of scope for stabilisation, the lack of incentives for public investment, and the pressure towards very low debt. On the other hand, it is criticised that the implementation is lax, while high debt ratios are not reduced. This article discusses options which may reconcile these competing objectives. On the one hand, a sufficiently ambitious target, which reduces high debt ratios, should be binding. To this end, predictability should be improved, the scope for discretion reduced and the budgetary surveillance be transferred to an independent, non-political institution. On the other hand, a prudently designed expenditure rule and, in particular, national rainy day funds could increase room for fiscal manoeuvre. If the inclusion of government investment in the rules would be considered a suitable design should limit fiscal risks. Therefore, a “capped golden rule” is introduced. It combines a swift reduction of high debt ratios with protection for investment.

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SUERF Policy Note, Issue No 111SUERF Policy Note, Issue No 111

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