27th Oct 2021

IMF urges EU to overhaul 'outdated' debt rules

  • The EU's economic rules should focus solely on reducing debt levels, the IMF has urged. (Photo: imf)

The EU should overhaul its rules on economic governance which are too rigid, outdated and complex, the International Monetary Fund (IMF) has warned.

In a staff paper published on Friday (29 May), the IMF argues that the bloc’s economic governance regime, which was revamped in response to the eurozone debt crisis, “involves multiple intricate rules that hamper effective monitoring and public communication”.

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  • (Photo: Kyrion)

The bloc’s stability and growth pact came into force in 1997, and requires governments to keep to a maximum deficit of 3 percent and a debt-to-GDP ratio of 60 percent. As part of the fiscal compact treaty agreed by all EU governments apart from the UK in 2012, these rules are now written into national constitutions.

Meanwhile, the so-called 'six pack’ and ‘two-pack’ of legislative reforms adopted in 2011 and 2013 set out a host of other economic indicators that governments should adhere to.

But while most governments across the bloc have now brought their deficits within the 3 percent limit, debt burdens have soared. The average national-debt-to-GDP ratio stands at 95 percent, almost 30 percent higher than its pre-crisis level in 2007.

The EU’s governance regime gives the European Commission the power to impose fines worth up to 0.2 percent of GDP on governments that persistently fail to meet targets to reduce their debts or deficits. The pact was first breached by France and Germany in 2004, and EU politicians remain reluctant to impose sanctions for non-compliance

France has been given a three/four year extension to bring its deficit within the 3 percent threshold by the end of 2016

The IMF paper contends that changes in underlying economic conditions in Europe have made the headline debt and deficit targets outdated, and calls for the budget deficit rule to be scrapped, in favour of making the public debt burden the “single fiscal anchor”, a move which would give governments more flexibility over spending.

“A 3 percent deficit target is consistent with a 60 percent debt level over the medium term only if nominal growth is slightly more than 5 percent,” it argues, adding that “potential growth has been revised down since the crisis, with medium term nominal growth now thought to be about 3 percent in many euro area economies.”

“This implies a 100 percent of GDP debt level over the medium-term, resulting in an inconsistency between the existing debt and deficit targets; in other words, the action path implied by the deficit target diverges from that required by the debt target.”

However, the paper warns that reforming the pact “may face legal obstacles, and in some cases, wholesale treaty changes may be needed.”

It concludes that “working for a simpler and more robust fiscal framework may be the best response to recent skepticism about the European project.”

The IMF is current evaluating its own role in response to the eurozone debt crisis, and its analysis will be welcomed by those who argue that the EU’s over-emphasis on slashing budget deficits has forced governments to adopt austerity policies that have harmed economic growth.

But reducing the importance or scrapping the budget deficit rule is unlikely to find favour in Germany, the main supporter of austerity economics.

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