Global fiscal systems – From crisis to sustainability?

 

While the repercussions of the financial and euro crises still weigh heavily on the policy focus, the time may nevertheless have come to reflect upon what lessons the euro area (EA) has learned from those crises. In this respect, an important question is whether the global fiscal architecture is now better equipped to provide long-term sustainability? On May 27th, Olli Rehn, Monika Queisser and Jeromin Zettelmeyer were invited to CEPS to present their report, entitled “Global Fiscal Systems: From crisis to Sustainability”, and prepared, with other noted economists, for the Global Agenda Council on Public Finance and Social Security of the World Economic Forum. Their report comes to the overall conclusion that many important steps have indeed been taken during the crisis years that would have been unthinkable only a decade earlier. Focusing on the case of the euro area, for example, the Banking Union is now under construction while the European Stability Mechanism (ESM) has already provided the EA with a crisis buffer, and other measures have been taken to make the system more resilient to (small) shocks and reduce their occurrence in the future. However, during the discussion, several participants and some of the speakers cast doubt over the sustainability of the debt situation and whether the current EA fiscal rules can effectively alter the debt trajectory. It emerged that (re)introducing market discipline, even combined with some type of common debt issuance, could provide significant benefits, but the transition to such a system may prove too disruptive in the current economic environment, plagued with high debt levels. Furthermore, since the political appetite for such a scheme is currently not likely to materialise, we are left with a still fragile system of neglected rules and the looming threat of another debt crisis.