National debt: EU fiscal rules should enable growth and employment

Ausgabe 07/2021

The EU’s strict guidelines on public debt have already proved to be unfit for purpose in the Euro crisis: according to an analysis by IMK and WSI, instead of stabilising the economy the imposition of austerity was detrimental to growth and delayed the recovery of public finances. If this mistake is not to be repeated in the wake of the Covid-19 crisis reforms are urgently needed.

The researchers assert that the European fiscal rules have a ‘procyclical effect’: the one-sided obsession with budgetary discipline entails that, during a downturn, policymakers have to impose cuts, stifling economic development even more. The upper limit on public debt of 60 per cent of GDP should be substantially corrected upwards. Calculations have shown that even a rate of 100 per cent would be perfectly feasible. 

Another step the researchers recommend is to replace the current 3 per cent deficit rule with a spending rule. Under such a rule, as soon as public debt exceeds a certain value an upper limit should kick in for the growth of non-cyclical non-investment public spending. Additional spending would have to be offset. Public investments, in turn, would be exempted from this rule. According to IMK and WSI, the so-called ‘golden rule’ would apply, which basically permits credit financing for investments. 

Reform is also needed, according to the analysis, in relation to tackling macroeconomic imbalances.  In order to limit differences in competitiveness and the current account it is essential to keep an eye, among other things, on the macroeconomic effects of wage policy. But this depends on whether the collective bargaining partners are really able to keep nominal wage development in hand. The member states could underpin functioning collective bargaining systems, among other things, with minimum wages, declaring agreements generally binding, or linking public contracts to compliance with collective agreements. Price and wage developments, however, can also be indirectly managed through fiscal policy. The EU, in turn, should lay down compliance with collectively bargained wages in European procurement law and provide for a European minimum wage standard. 

The existing procedure for avoiding or correcting macroeconomic imbalances is sound in principle, but suffers from the fact that it is one-sidedly designed to improve the competitiveness of countries with current account deficits. For example, deficits may not exceed 4 per cent of GDP, surpluses 6 per cent. Although there is an upper limit for rises in unit wage costs there is no lower limit. Symmetrical provisions are needed to ensure that there is no ‘race to the bottom’. The spectrum of indicators used must also be narrowed. 

On top of that, the researchers believe that the Macroeconomic Dialogue must be strengthened in order to coordinate the actions of governments, the central bank and the social partners. The existing dialogue at EU level needs to be upgraded, and should be supplemented with corresponding formats for the euro area and at national level.