Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

29 October 2021

EURACTIV: ESM economists want to raise public debt limit to 100% of GDP


The European Stability Mechanism’s economists are unlikely radicals. The ESM is responsible for providing emergency fiscal support to member states in case of financial distress.

In a new discussion paper, economists at the EU’s bailout fund have suggested a simplification of the  bloc’s fiscal rules. Their contribution comes a week after the Commission relaunched a review of the EU’s fiscal rules.

New economic reality

In their discussion paper, the authors praise the EU’s fiscal framework for having helped to improve fiscal coordination and for having contributed to a position that allowed the EU to react to the economic shock delivered by the pandemic.

Still, they see a need for the EU’s fiscal rules to change. The economists claim that a “new economic reality necessitates a fresh look at the European fiscal rules.” These new economic realities are the low borrowing costs for EU member states and the high levels of debt after the pandemic.

Moreover, the authors criticise the current fiscal framework for its complexity.

A higher limit to public debt

In concrete terms, the authors argue that the limit on public debt levels should be raised from 60% of GDP to 100% of GDP. They suggest, however, to keep the current deficit rule that limits yearly deficits at a maximum of 3% of GDP.

Additionally, the ESM economists suggest to replace the rules on the structural deficit with an expenditure rule. The rules that currently limit structural deficits have been criticised for their reliance on unobservable variables and opaque calculation methods.

The expenditure rule they suggest would limit the public expenditure of all member states. If the ESM economists had it their way, expenditures would not grow faster than the economic growth trend in these countries.

In today’s fiscal rules, countries with debt levels above 60% of GDP have to reduce their debt levels by a twentieth of the difference between their current debt levels and the 60% threshold. For a highly indebted country like Italy, this would mean that it would have to reduce debt levels by around 5% per year, thereby stifling economic growth.

Lowering debt levels is still the goal

The ESM economists argue that states should continue to adhere to the principle of decreasing debt levels if they are above 100% of GDP. To this end, countries should have primary surpluses in all years, even in times of an economic downturn.

Last week, the EU commission relaunched a review of the EU’s fiscal rules that have long been subject to intense arguments. Commissioner Paolo Gentiloni called for a broad debate “without taboos”. The Commission hopes that the debate will help to overcome the entrenched views on fiscal policy in the EU so that a compromise might become possible.


EURACTIV



© EURACTIV


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment