The European Union should abandon fixed-in-stone deficit targets and pursue growth to reign over debt.
That is the conclusion of the second annual report published by the European Fiscal Board (EFB) released on Wednesday.
What is required, the EFB argues, is to scrap budget rules. The EU should get rid of the nominal ceiling of 3% GDP deficit ceiling. Instead, the Commission should focus exclusively on reducing the debt.
The EFB is an independent body mandated to advise the European Commission on the direction of the fiscal policy of the euro area; the agency also evaluates how the EU budgetary governance framework is implemented.
That was not the first time the EU counselling body makes this remark.
In its 2017 annual report, the EFB argued that some modulation of flexibility and discretion across the cycle was preferable to a rigorous and unconditional implementation of EU fiscal rules.
What’s more, the EFB notes, the EU has missed the opportunity of steady growth to reign over public debt in the EU.
Because there was no flexibility in fiscal policy, “high-debt countries and countries in the excessive deficit procedure minimised fiscal consolidation, while some countries with fiscal space decided to do more than required.”
The EFB argues that countries that improved their debt-to-GDP ratio position have done so because of growth, not fiscal consolidation. In this scheme, existing budgetary rules are counterproductive.
The report appears to be supporting the argument made by the Italian government, which calls for a more significant deficit. The report suggests that although the objective should remain for Eurozone members to maintain debt levels below 60% of GDP, they should be given periods of adjustment well above 15 years.
In addition, the EFB would like to see fiscal non-compliance penalties become less severe and more gradual since current draconian measures are rarely applied.