22 Oct 2021

Fiscal rules in a post-Covid brave new world

No need to sprint

Daniel Gros / Francesco Corti

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On 19 October 2021, the European Commission published a Communication to relaunch the public debate on the review of the EU economic governance framework. A key issue to be discussed is how to ensure sustainable public finances in all Member States when the ‘general escape clause’ is eventually lifted, in place since March 2020.

At the centre of this debate is the question as to whether, with the onset of the economic recovery, there should (or should not) be a return to a rigid enforcement of the fiscal rules. This paper focuses on the debt reduction criterion and observes that this has become easier to achieve during the post-Covid recovery period because nominal GDP growth is now higher than before the crisis, thus reducing the primary surplus required to achieve any given reduction in the debt-to-GDP ratio.

As such, this paper concludes that addressing the question of the return to European fiscal framework looking at the debt reduction criterion is less relevant than it initially appears, at least in the current economic circumstances.

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