Cottarelli, C. (2015) “Potential growth rates and the working of SGP fiscal rules“, VoxEU Organisation, 02 March.
The European Commission has clarified the flexibility in existing Eurozone fiscal rules. This column argues that the emphasis on structural rather than headline deficits is desirable but requires identification of potential growth rates. The way the Commission currently estimates potential output yields potential growth estimates that are very low. Thus, a year of modest expected growth like 2015 may be treated as a year of economic boom that requires faster than normal fiscal adjustments.
The 13 January 2015 European Commission’s communication on “Making the best use of the flexibility within the existing rules of the Stability and Growth Pact” usefully clarifies that EU members struggling with weak cyclical conditions would be allowed to slow down the pace of their fiscal adjustment (European Commission 2015). But the extent to which this clarification is helpful hinges on how the Commission will assess whether cyclical conditions are indeed weak. The approach currently followed is problematic. Let me explain why and how the problem can be fixed.
Relevant posts:
- Mitchell, B. (2014) “IMF attacks the Stability and Growth Pact“, Bill Mitchell Blog, 26 June.
- Frayne, Christine, Jaffee, Elizabeth, Riso, Stéphanie, (2013), “Building a Strengthened Fiscal Framework in the European Union: A Guide to the Stability and Growth Pact”, European Economy, Occasional Papers, N.150.
- Muscatelli, Vito & Piergiovanna, Natale, (2012), ‘A simple and flexible alternative to Stability and Growth Pact deficit ceilings. Is it at hand?’, European Journal of Political Economy,Volume 28, Issue 1, p.p. 14–26.