Making sense of the European Commission's fiscal governance reform plan
Lucio Pench
The European Commission's April 2023 proposals for the reform of European Union fiscal governance revolve around the principles of fiscal sustainability and national ownership. While the criterion of sustainability is at the centre of the proposals, its practical implications for the assessment of compliance of national medium-term fiscal-structural plans with the new fiscal rules have been blurred by a proliferation of additional criteria or safeguards. These include a requirement for a country's debt level at the end of the medium-term horizon to be lower than at the beginning. This Policy Brief argues that the fiscal sustainability criterion, which the legislative proposals formulate in broad qualitative terms (public debt being on "a plausibly downward path ... or … staying at prudent levels") can be operationalised to ensure the objective of de-risking of public debt, ie the eventual removal of situations in which debt poses a high sustainability risk. Specifically, for a plan to satisfy the sustainability criterion, it should ensure that the country in question graduates out of the high-risk category or does not fall into it. It is further argued that the additional criteria or safeguards have limited value added and hamper the overall readability of the proposed reform. This proliferation of criteria should not be taken as compromising the fundamentals of the reform, however: a careful textual and contextual reading of the relevant legal provisions allows for an 'overall assessment' by the Commission and the Council of the medium-term plans submitted by EU countries, in which compliance with the additional safeguards could be given a subordinated role relative to the sustainability criterion. Ideally, a clarification of the methodology for assessing compliance with the debt-sustainability criterion would allow the additional safeguards to be dispensed with. Political concerns lay behind the demand for additional safeguards, but these should be addressed through institutional rather than rule-based solutions. Implementation and enforcement will be critical. This Policy Brief offers proposals to enhance institutional self-commitment to implementation, with reputational consequences for non-implementation.
