Sunday

25th Jun 2017

EU rules should focus on debt not deficit targets, says IMF official

  • "Plenty of room for improvement," to eurozone rules, Olli Rehn conceded at the Brussels Economic Forum

The EU’s rules on cutting national budget deficits discourage public investment and "imply procyclicality," prolonging the effects of a recession, a senior IMF official has said.

Speaking on Tuesday (10 June) at the Brussels Economic Forum, Reza Moghadam said that reducing national debt piles should be the focus of the EU’s governance regime, adding that the rules featured “too many operational targets” and a “labyrinth of rules that is difficult to communicate.”

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

“Debt dynamics i.e., the evolution of the debt-GDP ratio, should be the single fiscal anchor, and a measure of the structural balance the single operational target,” said Moghadam, who heads the Fund’s European department.

“The rules are still overlapping, over specified and detract focus from the overall aim of debt sustainability,” he said.

The bloc’s stability pact drafted in the early 1990s, and reinforced by the EU’s new governance regime, requires governments to keep to a maximum deficit of 3 percent and a debt to GDP ratio of 60 percent.

However, six years after the start of the financial crisis, the average debt burden has swelled to just under 90 percent of economic output, although years of prolonged budget austerity have succeeded in reducing the average deficit exactly to the 3 percent limit.

But critics of the rules say they were drawn up when countries were anticipating prolonged economic growth at rates of between 3 and 5 percent, a far cry from the EU’s expectations post-financial crisis.

Others argue that the regime is inflexible and forces governments to slash public spending when it is most needed at the height of a recession.

“Fiscal frameworks actively discourage investment....and imply pro-cyclicality and tightening at the most difficult times,” commented Morghadam, who noted that “they had to be de facto suspended during the crisis.”

Procyclical policies are seen as those which accentuate economic or financial conditions, as opposed to counter-cyclical measures which can stimulate economic output through infrastructure spending during a recession.

Italian prime minister Matteo Renzi has indicated that he will use his country's six-month EU presidency, which starts in July, to push for the budget rules to be temporarily loosened for governments who invest in growth-fostering reforms such as infrastructure projects or research and innovation.

Italy remains within the 3 percent deficit limit, but a stagnant economy has pushed its overall debt level to 133 percent of GDP, second in size only to Greece in the EU.

However, the idea of having an investment 'golden rule' in the regime was left out of the EU’s revised economic governance regime.

For his part, Morghadam said that a mechanism to exclude public investment from deficit calculations “would not be desirable and encourage creative accounting”.

Instead he called for the EU to have a greater role in funding public infrastructure projects through public/private partnerships.

In response, economic affairs commissioner Olli Rehn, a chief architect of the new regime, conceded that there was “plenty of room to simplify the rules,” but added a caveat.

“If you simplify the rules excessively it is difficult to avoid making them pro-cyclical,” he said.

Analysis

France falls victim to EU's economic powers

Being singled out for censure by the European Commission is nothing new for the government of Francois Hollande. But the timing of the latest veiled threat from Brussels could hardly be worse.

Eurozone needs 'limited fiscal solidarity'

The eurozone should consider introducing treasury bills, a special budget and a finance ministry, says a new ideas paper ahead of next week's summit.

New accounting rules save EU deficit

Budget deficits in the EU were within the limits set out in the bloc's stability pact in 2013 thanks to changes to accounting rules.

News in Brief

  1. Merkel and Macron hold symbolic joint press conference
  2. Juncker has 'no' clear idea of kind of Brexit UK wants
  3. Belgian PM calls May's proposal on EU citizens 'vague'
  4. UK lacks support of EU countries in UN vote
  5. Spain to command anti-smuggler Mediterranean force
  6. Estonia confirms opposition to Nord Stream 2 pipeline
  7. Ireland and Denmark outside EU military plan
  8. EU leaders renew vows to uphold Paris climate deal

Stakeholders' Highlights

  1. EPSUOn Public Services Day, Stop Austerity! Workers Need a Pay Rise!
  2. EGBAOnline Gambling: The EU Court Rejects Closed Licensing Regimes In Member States
  3. World VisionFaces of Today, Leaders of Tomorrow: Join the Debate on Violence Against Girls - 29 June
  4. ECR GroupThe EU Must Better Protect Industry from Unfair Competition
  5. Malta EU 2017Better Protection for Workers From Cancer-Causing Substances
  6. EPSUAfter 9 Years of Austerity Europe's Public Sector Workers Deserve a Pay Rise!
  7. Dialogue PlatformGlobalised Religions and the Dialogue Imperative. Join the Debate!
  8. UNICEFEU Trust Fund Contribution to UNICEF's Syria Crisis Response Reaches Nearly €200 Million
  9. EUSEW17Bringing Buildings Into the Circular Economy. Discuss at EU Sustainable Energy Week
  10. European Healthy Lifestyle AllianceCan an Ideal Body Weight Lead to Premature Death?
  11. Malta EU 2017End of Roaming Charges: What Does It Entail?
  12. World VisionWorld Refugee Day, a Dark Reminder of the Reality of Children on the Move

Latest News

  1. Macron’s investment screening idea watered down by leaders
  2. Leaders unimpressed by May’s offer to EU citizens
  3. New Irish PM praises unscripted nature of EU summits
  4. EU extends sanctions on Russia
  5. UK's universities set 'Brexit wish list'
  6. Decision on post-Brexit home for EU agencies postponed
  7. May's offer on citizens’ rights dismissed as ‘pathetic’
  8. 'Historic' defence plan gets launch date at EU summit