Stable and enforceable: a new fiscal framework for the Euro area

Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappeari...

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Bibliographic Details
Published in:International economics and economic policy 2011-09, Vol.8 (3), p.225-245
Main Authors: Hughes Hallett, Andrew, Jensen, Svend E. Hougaard
Format: Article
Language:English
Subjects:
Borrowing
Councils
Debt restructuring
Economic crisis
Economic Policy
Economic stabilization
Economics
Economics and Finance
Eurozone
Fiscal policy
GDP
GNP
Gross Domestic Product
Gross National Product
International Economics
Macroeconomics/Monetary Economics//Financial Economics
Monetary policy
Monetary theory
Objectives
Original Paper
Public Finance
Public sector
R&D
Research & development
Studies
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Summary:Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from being undermined by undisciplined governments, there is a need for a framework capable of imposing fiscal discipline. This paper considers an intertemporal assignment, where fiscal policy focuses on long-term objectives and monetary policy on short-term stabilisation. We argue for public sector debt targets as a practical way to achieve such a set up, and an excess debt protocol is constructed to give enforceable form to those targets. The ideas of “fiscal space” and optimal debt levels are used to provide a mechanism for identifying a stable region within which the debt targeting regime should operate. Making these factors explicit would both improve the credibility of planned fiscal policies and reduce risk premia on borrowing costs. We finally show how Europe’s competitiveness pact, and debt restructuring operations, can be used to maximise the available fiscal space.
ISSN:1612-4804
1612-4812
DOI:10.1007/s10368-011-0198-8