On 10 November 2021, the European Fiscal Board (EFB) published its fifth annual report. The report assesses the implementation of the EU fiscal framework during the first year of the Covid-19 pandemic and clarifies the EFB’s reform proposals to account for post-pandemic realities.
The Covid-19 pandemic pushed the EU into an economic recession with an average annual decline in real GDP of more than 6% by 2020. Against such a backdrop, a number of important measures provided the necessary room for policy manoeuvre, notably the activation of the severe economic downturn clause of the Stability and Growth Pact, the ECB’s pandemic emergency purchase programme (PEPP) and the EU’s Next Generation EU (NGEU) initiative. At the same time, the policy response also revealed issues in the EU fiscal framework:
-the difficulty for some Member States to create fiscal buffers in good economic times
-the tendency to improvise new forms of flexibility in the application of the EU fiscal rules or new risk-sharing elements when times turn bad
-the lack of clarity on timing and conditions for the deactivation of the severe economic downturn clause.
The EFB welcomes the relaunch of the economic governance review, and its declared aim to build consensus well in time for 2023. Professor Niels Thygesen, Chair of the Board, underscored that the EFB’s reform proposals outlined before the pandemic had become more relevant: “the future focus should be on one primary objective, a long-run anchor for public debt, with one main operational rule - an expenditure benchmark - to target a gradual reduction of the debt ratio towards the anchor at a pace tailored to country circumstances. A single escape clause to be applied under well-specified conditions and backed by independent economic analysis would complete the system.”
The EFB also advocates maintaining clear and recognizable reference values for a sound fiscal framework. The 3% of GDP deficit threshold remains a useful backstop against unsustainable debt dynamics. Beyond the update of EU fiscal rules, the EFB reiterates the need to create a permanent central fiscal capacity for stabilisation and arrangements to protect government investment.