The IMF asks Brussels to reformulate the “old” deficit and debt rules

Headquarters of the European Commission in Brussels. / CR

Urges the European Commission to "take advantage" of the escape clauses activated since the panemide to adapt and make the current rules more flexible

Jose Maria Waiter

The International Monetary Fund (IMF) urges the European Commission to "take advantage" of the current situation in which all EU countries find themselves immense, with intense public support plans to contain the effect of inflation, to reform those that referred to as fiscal "old rules" "with all the problems" that they entail. This is how blunt the organization is, which advocates carrying out this reform now, at which time the escape clause is activated, at least until 2023. That is, the flexibility that the States have so as not to have to comply with the historical deficit and debt objectives with which Brussels has always shown an iron attitude.

These limits establish a maximum public deficit of 3% of the Gross Domestic Product (GDP) and a debt that does not represent more than 60% of the national wealth of each Member State. Objectives that seem more than distant. Only in the case of Spain, the deficit is expected to exceed 5% this year, despite the significant reduction in the last two years; and public debt, well above 110% in the medium term.

That is why, for the IMF, "the opportunity should not be wasted", in reference to that reform. Specifically, he points out that the EU "needs renewed fiscal rules that have the flexibility for bold and fast policies when necessary, but without endangering the sustainability of public finances." In addition, he considers that "it is essential to avoid debt crises that could have major destabilizing effects and endanger the EU itself." What will require "building larger fiscal buffers in normal times."

The IMF proposal is structured around three main axes: modernize numerical fiscal rules to explicitly take into account the risks faced by countries while having a clear medium-term orientation; strengthening of national fiscal institutions to improve policy debate and ownership; and the creation of an EU fund to help countries better manage economic downturns and provide essential public goods.

In the first place, the IMF considers that the deficit and debt objectives must be accommodated at a speed "according to the degree of fiscal risks". Those risks should be identified by debt sustainability analysis using a common methodology, developed by a new and independent European Fiscal Board, or EFC, in consultation with each state. And he considers that "the countries with the greatest fiscal risks would have to converge to zero or a positive general fiscal balance during the next three to five years." At the same time, economies with lower fiscal risks and debt below 60% would have "more flexibility, but still need to factor risks into their plans." Thus, he considers that “the accumulation of fiscal buffers that allow significant flexibility to respond to adverse shocks and carry out a countercyclical policy would be encouraged”, as in cases of the pandemic or the war in Ukraine.

On the other hand, it suggests that all EU countries would need to enact medium-term fiscal frameworks and set multi-year annual spending caps consistent with their balance sheet anchor over the period. With fiscal councils that would play a greater role in strengthening checks and balances at the country level, including preparing or approving macroeconomic projections, assessing fiscal risks, and ensuring the consistency of spending ceilings and fiscal plans. The European Commission would continue to perform its key oversight role and the EFC would serve as the central node for a network of national tax agencies.

Finally, two keys would be established: improving macroeconomic stabilization, especially when politics is operating at the effective lower limit, and allowing the provision of common public goods at the EU level, such as climate change and energy security infrastructure. And a dedicated climate investment fund is an important part of the proposal.

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