Without major reform of the EU fiscal framework, Peter Bofinger argues, public investment will be insufficient in the wake of the pandemic.
The strong fiscal-policy response from the European Union needed to deal with the severe economic shock represented by the Covid-19 pandemic was only made possible by finance ministers agreeing on March 23rd, for the first time, to activate the general escape clause of the EU fiscal framework. It is very likely, however, that that clause will be reinvoked in 2021 and 2022. But what happens if the conventional rules are reinstated?
During the pandemic the state of public finances in all countries has deteriorated significantly. According to forecasts by the International Monetary Fund, in several euro-area member states in 2021 the ratio of debt to gross domestic product will be around double (Belgium, France, Spain and Portugal) or even triple (Italy, Greece) the 60 per cent ceiling set by the Maastricht treaty (Figure 1).
These high debts raise huge challenges for fiscal policy in the member states. The so-called six pack, which came into force in December 2011, obliges them to reduce the difference between their current debt and the 60 per cent benchmark by one 20th per annum. As calculations by the European Fiscal Board show, the requirement to bring debt below that limit within two decades implies running high budget primary surpluses.
"Social Europe publishes thought-provoking articles on the big political and economic issues of our time analysed from a European viewpoint. Indispensable reading!"
Columnist for The Guardian
Thank you very much for your interest!Now please check your email to confirm your subscription.
Even under benign conditions (nominal growth exceeding the nominal interest rate by half a percentage point), countries with a debt-to-GDP ratio of 120 per cent must achieve a primary surplus of 1.9 per cent, countries with a debt-to-GDP ratio of 150 per cent a surplus of 2.9 per cent. Comparing these figures with the average primary surpluses the highly indebted euro-area member states were able to achieve between 2014 and 2019, it obvious that the required debt reduction could only be realised with brutal austerity (Table 1).
The experience of the last decade shows that fiscal consolidation has a negative impact on public investment, as such expenditure is easier to cut than social spending or salaries for the public sector (Figure 2).
This outcome is hardly surprising, as public investment does not play a relevant role in the framework of the Stability and Growth Pact. The anchor of its rule book is the ratio of gross public debt to GDPtaking in the liabilities of the public balance sheet without any reference to public capital stock on the asset side. Nor does the 3 per cent budget-deficit constraint discount public investment. As the EFB points out, the so-called investment clause, which provides some leeway for debt-financed public investment, has rarely been invoked, primarily because it requires a negative growth forecast or an output gap below 1.5 per cent of potential GDP.
As a result, since 2012 net public investment in the euro area has been close to or even below zero (Figure 3). It has been much lower than in the EU member states outside of the eurozone and in the United States.
Restoring this fiscal framework after the exceptional regime of the Covid-19 crisis would thus make it impossible to finance the huge public investments required to deal with the simultaneous challenges of climate change, the consequences of the pandemic and the digital transformation.
An obvious starting point for reform of the Stability and Growth Pact is the 60 per cent anchor for public debt. It was derived as the average debt-to-GDP ratio of the EU member states in 1990. With the same procedure, a reference value of 70 per cent could be calculated for 2000, of 86 per cent for 2010 and 101 per cent for 2020.
As you may know, Social Europe is an independent publisher. We aren't backed by a large publishing house, big advertising partners or a multi-million euro enterprise. For the longevity of Social Europe we depend on our loyal readers - we depend on you.
Academic economists have been unable to derive scientifically a benchmark with which evidence-based economic policy should comply. A prominent instance was the 2010 paper by Reinhart and Rogoff which tried to establish a reference value of 90 per cent but was found to suffer from serious miscalculations. A 2014 IMF working paper concluded:
Our results do not identify any clear debt threshold above which medium-term growth prospects are dramatically compromised. On the contrary, the association between debt and medium-term growth becomes rather weak at high levels of debt, especially when controlling for the average growth performance of country peers.
As a consequence of this ambiguity, a former IMF chief economist and colleagues have recently proposed to replace fiscal rules by fiscal standards:
Whether debt is at risk of becoming unsustainable does not just depend on debt and deficit levels but on a host of uncertain economic and political factors. Fiscal rules, even complex ones, cannot account for this uncertainty, because it is impossible to predict and specify the relevant contingencies ex ante. Rules are bound to lead to mistakes, constraining fiscal policy either too much or too little.
The key decision for eurozone members is whether they are willing to abandon, or significantly weaken, the debt-reduction rule of the six pack. A new rule might taper the period for adjustment to 50 years or the same goal could be achieved on a discretionary basis, with country-specific medium-term debt targets decided by the European Commission and the Council of the EU.
Depending on interest rates and on projected nominal growth rates, such debt targets could leave room for primary deficits. To guarantee that this fiscal space was used for investments, the approach should be supplemented by a golden rule. Such a rulethe notion that public borrowing should finance investment but not mere day-to-day spendinghas the advantage over debt rules that it is widely accepted among economists. Even the conservative German Council of Economic Experts, when developing the countrys debt brake (Schuldenbremse) in 2007, explicitly included the golden rule.
The advantages and problems associated with the golden rule have been intensively discussed. The main problem is an adequate definition of investment. Should it be defined as gross or net? And should it be limited to bricks and mortar or defined in a more encompassing way as future-oriented investmentsincluding public expenditures on education and families, on better health systems and the fight against climate change?
Pragmatically, public investment could be defined as net investment plus all expenditures related to education, climate change, digitalisation and research and development exceeding the average of 2014 to 2019. Categorisation of expenditures as coming under the golden rule should require the approval of independent national fiscal watchdogs.
Within such a framework an expenditure rule could play an important rolein fact, many fiscal-policy reform proposals favour it. But to derive the concrete expenditure path a proper target for debt levels must first be established. Then a golden rule can ensure that a possible space for deficits is used for broadly defined public investment.
This article is a joint publication bySocial EuropeandIPS-Journal
See the original post here:
Easing the EU fiscal straitjacket - Social Europe
- Golden Rule Plumbing, Heating & Cooling - December 19th, 2016 [December 19th, 2016]
- Golden ratio - Wikipedia - December 30th, 2016 [December 30th, 2016]
- Golden Rule: Treat People as You'd Like to Be Treated - January 2nd, 2017 [January 2nd, 2017]
- Rockwell's "Golden Rule" - Norman Rockwell Museum - The Home ... - January 2nd, 2017 [January 2nd, 2017]
- Golden calf - Wikipedia - January 16th, 2017 [January 16th, 2017]
- Live by the Golden Rule (pledge/petition/proclamation ... - January 19th, 2017 [January 19th, 2017]
- Matriarchy - Wikipedia - January 23rd, 2017 [January 23rd, 2017]
- The Golden Rule | Our Daily Bread - odb.org - February 1st, 2017 [February 1st, 2017]
- Golden LivingCenter Golden Rule - February 1st, 2017 [February 1st, 2017]
- Opinion: No room for walls in Gospel's Golden Rule - The Catholic Register - February 7th, 2017 [February 7th, 2017]
- Let the Golden Rule be our response locally and globally - Berkeley Independent - February 7th, 2017 [February 7th, 2017]
- Rev. Jeff Bobin: The Golden Rule - GoErie.com - February 7th, 2017 [February 7th, 2017]
- No Gods, No Masters: Live the Golden Rule - Dissident Voice - February 7th, 2017 [February 7th, 2017]
- Good neighbors and the Golden Rule - WiscNews - February 11th, 2017 [February 11th, 2017]
- Shock on The Voice UK as coaches break a golden rule of the show and meet rejected Blind Audition singer Ciara Harvie - Radio Times - February 12th, 2017 [February 12th, 2017]
- Health Insurance to Meet Your Needs & Budget | UnitedHealthOne - February 12th, 2017 [February 12th, 2017]
- Trenton man reminded of Golden Rule in wake of Quebec attack - Northumberland News - February 13th, 2017 [February 13th, 2017]
- Following the golden rule in times of tumult - College Heights Herald - February 14th, 2017 [February 14th, 2017]
- The Golden Rule of Business - Times-Citizen Communications - February 15th, 2017 [February 15th, 2017]
- A Fool's Golden Rule - Word and Way - Word and Way - February 15th, 2017 [February 15th, 2017]
- h3cz: The Golden Rule of Twitter - Dexerto - February 16th, 2017 [February 16th, 2017]
- LETTER: Living by 'Golden Rule' would defeat ISIS - Daily Record - Daily Record - February 16th, 2017 [February 16th, 2017]
- Motivating Your Team: Why The Golden Rule Doesn't Always Apply - Forbes - February 16th, 2017 [February 16th, 2017]
- Would golden rule survive if we were under siege? - Port Huron Times Herald - February 20th, 2017 [February 20th, 2017]
- Apply the Golden Rule to lift results - Business Management Daily - February 22nd, 2017 [February 22nd, 2017]
- 57th District It's the Golden rule: J. Central moves into 7th straight finals - The Independent - February 23rd, 2017 [February 23rd, 2017]
- The Golden Rule of Social Selling: Solve Your Customer's Problem - Business 2 Community - February 24th, 2017 [February 24th, 2017]
- From mushroom picker to deputy sheriff: Herc Avello relishes golden rule - Daily Local News - February 24th, 2017 [February 24th, 2017]
- United Way to present Golden Rule-Lightkeepers, Fabric of our Community Awards - Jacksonville Daily News - February 24th, 2017 [February 24th, 2017]
- Ron Forthofer: To live by the Golden Rule, we must recognize the 'others' - Longmont Times-Call - February 24th, 2017 [February 24th, 2017]
- Measuring life by the Golden Rule ... not a cellphone app - Bristol Herald Courier (press release) (blog) - February 25th, 2017 [February 25th, 2017]
- Apply the Golden Rule to immigrants - Statesman Journal - February 28th, 2017 [February 28th, 2017]
- Five golden rules to always be in profit when you invest in equities - Economic Times - March 1st, 2017 [March 1st, 2017]
- Email and The Golden Rule - Memphis Daily News - Memphis Daily News - March 1st, 2017 [March 1st, 2017]
- Is the Golden Rule Still Alive and Well in America? - Huffington Post - March 1st, 2017 [March 1st, 2017]
- Engineering's Golden Rule - Sourceable - March 2nd, 2017 [March 2nd, 2017]
- Golden Rule of Chaplaincy: Thy Shoes Matter - Boston.com - March 3rd, 2017 [March 3rd, 2017]
- Career Corner: The Golden Rule - Journal Record (subscription) - March 3rd, 2017 [March 3rd, 2017]
- Much to be gained from Golden Rule - Jackson Clarion Ledger - March 6th, 2017 [March 6th, 2017]
- OPINION: If only our institutions practiced the Golden Rule - Opinion ... - Nantucket Island Inquirer - March 7th, 2017 [March 7th, 2017]
- Biffy Clyro swap The Golden Rule for the Golden Can as they receive Tennent's Lager award - Glasgow Evening Times - March 9th, 2017 [March 9th, 2017]
- In the Neighborhood: A Meditation on the Golden Rule, Cheaters, and Prophets - Patheos (blog) - March 11th, 2017 [March 11th, 2017]
- Ferrari's Golden Rule: No Pink Cars - The Drive - April 8th, 2017 [April 8th, 2017]
- Letter: Remember the Golden Rule - Asheville Citizen-Times - April 8th, 2017 [April 8th, 2017]
- Remember the Golden Rules During ATV Safety Week - Legal Examiner - June 6th, 2017 [June 6th, 2017]
- The ATRA Golden Rule Warranty Program - June 9th, 2017 [June 9th, 2017]
- Historic Golden Rule Peace Boat on its way to Noyo Harbor! - Ft. Bragg Advocate-News - June 10th, 2017 [June 10th, 2017]
- The Golden Rule is universal - Montrose Daily Press - June 10th, 2017 [June 10th, 2017]
- Lawmakers should practice the Golden Rule - Times Daily - June 11th, 2017 [June 11th, 2017]
- Golden rule - Northwest Arkansas Democrat-Gazette - June 13th, 2017 [June 13th, 2017]
- Argentina's national football team reaches out to The Golden Rule ... - Coconuts - June 14th, 2017 [June 14th, 2017]
- What Is the Golden Rule? - East Texas Review - June 14th, 2017 [June 14th, 2017]
- The Not So Golden Rule - HuffPost - June 14th, 2017 [June 14th, 2017]
- Let's give the 'Golden Rule' a try; it can't hurt - Montana Standard - June 14th, 2017 [June 14th, 2017]
- The Golden Rule of Online Dating - HuffPost - June 16th, 2017 [June 16th, 2017]
- Golden rule: Warriors beat Cleveland Cavaliers in Game 5, clinch championship - Arkansas Online - June 17th, 2017 [June 17th, 2017]
- Apple's Stock Will Treat You Just Fine If You Remember This One Golden Rule, Jim Cramer Reveals - TheStreet.com - June 17th, 2017 [June 17th, 2017]
- Anti-nuclear peace boat moors in Bodega Bay - Sonoma West - June 17th, 2017 [June 17th, 2017]
- At this water park, inclusion is the golden rule - Mother Nature Network - June 17th, 2017 [June 17th, 2017]
- Kiwanis Club honors students for following the Golden Rule | Local ... - Chippewa Herald - June 17th, 2017 [June 17th, 2017]
- Bishop: A Golden Answer to Every Problem - Florida Today - June 20th, 2017 [June 20th, 2017]
- Golden Rule Charter School - June 21st, 2017 [June 21st, 2017]
- The Three Golden Rules of Tax - MinuteHack (registration) (blog) - June 22nd, 2017 [June 22nd, 2017]
- Heimerman: Officer reminds us of the golden rule | Daily Chronicle - DeKalb Daily Chronicle - June 22nd, 2017 [June 22nd, 2017]
- REV. TONY ELDER: Be a person of integrity in dealing with others - Rockdale Newton Citizen (press release) (registration) - June 23rd, 2017 [June 23rd, 2017]
- Kids Learning Golden Rule Applies to Treatment of Animals ... - Noozhawk - June 26th, 2017 [June 26th, 2017]
- The Golden Rule of Online Dating Photos - The Good Men Project (blog) - June 26th, 2017 [June 26th, 2017]
- The Golden Rule Manila Bulletin News - Manila Bulletin - June 26th, 2017 [June 26th, 2017]
- A golden rule from Golden, CO: Please stop driving so loudly - 9NEWS.com - June 30th, 2017 [June 30th, 2017]
- Following the Golden Rule will help keep everyone safe while out enjoying the lakes this summer - Stanly News & Press - June 30th, 2017 [June 30th, 2017]
- Profiting from the Golden Rule - Valdosta Daily Times - July 3rd, 2017 [July 3rd, 2017]
- Sheriff's Tips: The Golden Rule - American Rifleman (press release) (blog) - July 14th, 2017 [July 14th, 2017]
- OPINION: The 'Golden Rule' in the face of a negative climate - Petoskey News-Review - July 14th, 2017 [July 14th, 2017]
- Golden Rule boat sails to Sacramento promoting nuclear ban | The ... - Sacramento Bee - July 14th, 2017 [July 14th, 2017]
- Promoting civility and practicing the Golden Rule every day - The Hill (blog) - July 14th, 2017 [July 14th, 2017]
- Golden Age Design Pops up at the Golden Rule in Excelsior - Midwest Home Magazine (registration) (blog) - July 14th, 2017 [July 14th, 2017]
- Is the Golden Rule Still Golden? - HuffPost - August 6th, 2017 [August 6th, 2017]
- Following the Golden Rule - Register Pajaronian - August 6th, 2017 [August 6th, 2017]
- Religion column: Follow the 'Golden Rule' - Daily Press - August 6th, 2017 [August 6th, 2017]
- Golden Rule Peace Boat moors in Monterey on voyage against nuclear weapons - Monterey County Herald - August 25th, 2017 [August 25th, 2017]