Today, we have published new @IMKFlash report with reform proposals for EU fiscal rules and economic governance (authors: @andrewwattEU, @chris_ptz Sebastian Watzka and myself). imk-boeckler.de/de/faust-detai… 1/
The starting point is the observation that EU rules have not met expectations in recent years. They have not prevented increases in debt ratios, nor have they always given countries sufficient room for manoeuvre for macroeconomically 2/
appropriate policies and credit-financed public investment. In addition, the Maastricht criteria of a maximum debt level of 60% and a deficit of 3% were established against the background of macro-economically very different framework conditions than today. 3/
At that time, interest rates were well above the growth rate. A certain caution was therefore called for with regard to the debt level. Today, interest rates have been below the trend growth rate for years. This makes debt much less dangerous, see the work of @ojblanchard1 . 4/
Moreover, after the corona crisis, hardly any country will be even close to the 60% debt ratio. Adhering to this ratio would mean an excessively restrictive fiscal policy for years to come - and thus a drag on the post-corona recovery. 5/
Hardly anyone in the finance ministries is satisfied with the existing procedures either.They are overly complex, offer much room for interpretation and exceptions, but are based on questionable variables such as the output gap - see discussion below. 6/
We therefore propose for the fiscal rules to switch from the deficit rule to a modified expenditure rule. If a country has a debt ratio of > 90%, it must reduce the growth in non-cyclical spending. 7/
Beyond this, investments should be able to be financed by a golden rule. There are exceptions if the country already has high primary surpluses (because the debt ratio then falls rapidly) and in crisis situations. 8/
Simulations show that, with such rules, even Italy, after the Corona crisis, is likely to reduce its debt ratio over the coming years and head towards 90% over the longer term. 9/
Our modifications avoid a massive oscillation around the debt target value, which @AchimTruger has pointed out and which can occur in the proposals of @FuestClemens @jzettelmeyer @agnesbq1 @Mfratzscher @henrikenderlein @nicolas_veron @isabel_schnabel, among others. 10/
Why 90%? It's pragmatic. There is no sound scientific evidence of where a limit lies above which government debt becomes harmful in the current interest rate environment. But we know that 100% is relatively easy to shoulder. 11/
With a little safety margin, therefore, 90% is a sensible "new 60%". However, given that even 100% is not dramatic, the adjustment to 90% should be made with caution and with regard to economic growth. 12/
In the report also: Proposals for reforming the procedure to avoid macroeconomic imbalances. In this case, streamlining of target values, symmetrical values for unit labour costs and current account balances and strengthening of the macroeconomic dialogue. 13/
