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Edited by G. Colazzo: The debate on how to improve the EMU's economic governance framework

The purpose of this paper is to collect and discuss relevant academic contributions and reform proposals, both preceding and following the Communication on Economic Governance Review of 5 February 2020, that are intended to respond to the critical issues for public debate identified by the Commission in order to enhance the current set of fiscal rules. A general observation can be summarized as follows: the euro-area aggregate fiscal stance has mostly remained procyclical or neutral. This suggests that fiscal policy in the Eurozone has barely complemented and supported the European Central Bank's (ECB) monetary policy in the attainment of both debt sustainability and macroeconomic stabilization, as many MSs did not properly take advantage of benign economic times to build up countercyclical buffers and gather enough fiscal space for automatic stabilizers and discretionary policy measures in bad times.

This issue is particularly relevant if nominal short-term policy rates hit the zero lower bound (ZLB), as the ECB is increasingly constrained and is likely to face a liquidity trap with its expansionary monetary policies, even unconventional ones, failing to substantially stimulate economic activity. In this regard, the deposit facility rate has been negative since 2014, when the ECB cut the interest rate on its main refinancing operations (MROs), also known as the repo rate, to approximately zero. For this reason, the ECB does not have a margin to further cut short-term rates to offset deflationary dynamics and its couple hundred-billion-euro supplementary money base is unlikely to substantially stimulate economic activity. Therefore, it may be necessary to redesign existing fiscal rules to make them more transparent and enforceable in order to safeguard budgetary discipline and debt sustainability in the long-run and, at the same time, flexible and contingent enough to allow for short-term stabilization. They should also be able to incentivize MSs to increase growth-enhancing net public investment.

While the consensus around the existence of various areas for improvement in the current SGP rule-based system, hence around the need to redesign it, appears almost unanimous, some disagreement about the design of the EMU's economic governance framework persists. In this respect, the Commission, in its Economic Governance Review of 5 February 2020, launched a debate on how to effectively reform the EMU's fiscal rules, identifying several issues for public debate raised to enhance the effectiveness of the EMU's economic governance framework. Here below we describe, also in analytical terms, the debate and the experts' contributions elicited by, or connected with, the questions raised by the European Commission in its Communication.

The debate on how to improve the EMU's economic governance framework .pdf361.92 KB