The Macroeconomic Effects of Re-applying the EU Fiscal Rules
This paper explored the macroeconomic consequences for the euro area as well as for France, Italy, Germany, and Spain, of a return to the status quo ante of EU fiscal rules and compared them to the effects of reforming them towards an expenditure rule. For the latter, NiGEM was extended with a public expenditure rule for the respective countries.
Pub. Date
20 November, 2023
Pub. Type
External Authors
Main points
- Returning to the unreformed set of rules of the Stability and Growth Pact (SGP) would entail substantial consolidation efforts leading to detrimental GDP effects. This holds especially if the current SGP is to be interpreted in the way it was in the past. A more flexible interpretations would, however, only somewhat ease the adjustment burden and still lead to a prolonged period of fiscal austerity in Europe.
- Successfully introducing and applying expenditure rules in a reformed SGP will critically depend on the precise parameter settings of the framework.
- Raising the debt target to 90% and applying less demanding fiscal adjustments would go a long way in achieving a growth-friendly consolidation.
- Even in the case with relatively low adjustment speed and correspondingly higher public expenditure trajectories, debt as a percentage of GDP is falling noticeably in all countries for which simulations were carried out.