The risks with reforming the Stability Pact
In this commentary Lorenzo Bini Smaghi argues that there are three risks associated with the reform of the Stability Pact. The first is a misdiagnosis, which would lead to reforming the Pact without really solving the problems. The second risk is that of implementing changes that produce pejorative effects compared to the current situation. The third risk is that the reforms will not be in line with the spirit of the treaty and will be rejected politically.
There is no doubt that behind some proposals to modify the Stability Pact, in particular those based on simpler rules and with few margins of flexibility, lies the objective of reducing the Italian public debt more rapidly. However, it may be questioned whether this objective is more easily achievable through a change of the Stability Pact’s, with the risks identified above, or through a different application of the Pact less discretionary and more transparent, aligning the margins of flexibility granted to the effective control of the commitments, for example in terms of reforms. In fact, if the application of the Pact has lost credibility, this is mainly due to the divergence between the conditions set for the use of flexibility and the verification of their implementation.
The Reform of the Stability and Growth Pact: Is it really necessary?
By: Lorenzo Bini Smaghi – Luiss, School of European Political Economy
A possible new fiscal framework
In this paper Romanelli et al. provide a critical review of the main proposals so far for the reform of the European fiscal framework and provide an alternative . Their suggestion involves a three-prong approach:
- The medium-term fiscal anchor: They argue that the 60 per cent threshold could remain in place but only as a way to identify the countries that must sign a sustainability pact. For countries with a debt ratio higher than 60 per cent, the pact will define country-specific debt reduction targets over a multi-year horizon (3-5 years), taking into account the starting conditions and the macroeconomic prospects. These targets should be agreed between the European Commission and the individual member state and then approved by the Council of the EU as part of the procedures under the European Semester
- The operational target: Once the above targets are determined, a multi-year profile for the headline balance would be defined, in principle determining adjustments which are uniformly distributed over time. Within this context the role of the national IFIs and the European Fiscal Board should be strengthened.
- Enforcement: Instead of financial sanctions which are difficult to implement, the authors propose to make participation in European funded programs, such as semi-permanent mechanisms designed in a similar way to NGEU, conditional on compliance with fiscal rules.
The new fiscal framework would have at its core the overarching objective of public debt sustainability, only preventing those national choices that represent a clear danger for the country itself or for its partners. Simplicity and transparency would be guaranteed by the use of observable indicators. The procedure for defining the objectives – grounded on information sharing and fair discussion – would strengthen national ownership and at the same time would result in a pact fully agreed upon by European institutions and other member states. Supervision by independent fiscal institutions would guarantee the fairness of the whole process.
The future of European fiscal governance: a comprehensive approach
Authors: Marzia Romanelli, Pietro Tommasino, Emilio Vadalà
From: Banca d’Italia
