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How to reform EU fiscal rules

Claeys, Grégory, Darva, Zsolt, (2016), “How to reform EU fiscal rules”, Bruegel, 12 April

The austerity policies implemented in many European countries since 2010 have contributed to the poor economic recovery, raising questions about why EU budget rules failed to deliver both economic stabilisation and public debt sustainability. In theory the current rules could do a good job, but in practice they face major hurdles. A key indicator used in the current rules is the structural budget balance. This is the government budget balance corrected for the effects of the business cycle and one-off payments such as bank bailouts. If the structural deficit is too high, then countries must adjust their budgets. If not, they do not have to adopt austerity measures. In theory, when a recession hits, the actual budget deficit deteriorates because of falling tax revenues and increased unemployment benefit payments, but the structural balance does not change for these reasons and therefore it does not trigger austerity policies.

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