Monday

20th Mar 2023

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.”

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

“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.

Agenda

EU summit zooms in on global roles This WEEK

Competitiveness is expected be on the top of the agenda of EU leaders after the EU Commission last week rolled out a series of proposals to boost the bloc's capacity in green tech.

Latest News

  1. 'Forever chemicals' industry hit by perfect storm
  2. EU summit zooms in on global roles This WEEK
  3. EU launches 'Hydrogen Bank' — but what is it?
  4. MEPs probing spyware 'stonewalled' by EU states
  5. Why the EU double standards on mental help for asylum seekers?
  6. 'Bravery has no gender', Ukrainian Nobel winner says
  7. Innovation and politics: an intertwined relationship
  8. Most Frontex deportations to take place from Germany, Italy

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic and Baltic ways to prevent gender-based violence
  2. Nordic Council of MinistersCSW67: Economic gender equality now! Nordic ways to close the pension gap
  3. Nordic Council of MinistersCSW67: Pushing back the push-back - Nordic solutions to online gender-based violence
  4. Nordic Council of MinistersCSW67: The Nordics are ready to push for gender equality
  5. Promote UkraineInvitation to the National Demonstration in solidarity with Ukraine on 25.02.2023
  6. Azerbaijan Embassy9th Southern Gas Corridor Advisory Council Ministerial Meeting and 1st Green Energy Advisory Council Ministerial Meeting

Join EUobserver

Support quality EU news

Join us