European economists: New fiscal rules will boost investments, but debt will be a challenge.

Opublikowano: 23/03/2023

The European Union has been debating the shape of fiscal policy and debt for years.  Polish Economic Institute and the Kiel Institute for the World Economy (IfW Kiel) asked leading EU economists about their opinion about future of the fiscal rules.  Most economists believe that a reform proposed by the European Commission will help to stimulate public investments, which could facilitate green transition of EU’s economies. They do not put much faith in reducing public debt levels, though.

European Commission announced a plan to reform EU’s fiscal rules. The European Commission’s new proposal calls for simpler and more flexible fiscal rules. Member states would to be obliged to present four-year plans for public investment and to gradually heal public finances where debt is too high.

The old framework was seen as ineffective. On the one hand, it allowed debt to grow significantly beyond the 60% debt-to-GDP limit. On the other hand, it did not provide stable financing for public investments and the European Green Deal.

Polish Economic Institute asked  58  panelists who joined European Economic Panel created by PEI and IfW Kiel to assess the Commission’s proposal. They were asked 3 questions:

  1. Whether new approach will result in even higher public debt-to-GDP ratios as more flexible rules could mean less effective enforcement.
  2. Whether new fiscal rules are likely to stimulate more public investments, i.e. in green transitions.
  3. Whether EU’s economic growth would be faster with more restrictive fiscal rules, i.e. to evaluate Commission’s proposal against more restrictive reform proposed by Germany’s Finance Minister.

Most of the panelists believe that the new rules will result in the slower consolidation of public finances. As many as 51% agree that the new rules mean accepting higher debt levels due to greater flexibility. Only 17% of respondents agree that the new rules will reduce debt. The remaining 32% of respondents abstained.

“As countries have more fiscal space, they will use it” said Bojan Ivanc, Chief Economist at Chamber of Commerce and Industry of Slovenia.

“The current framework is dysfunctional. Enforcement and transparency are both better” – said Jeromin Zettelmeyer, director of Bruegel.

There is more optimism about the prospects for increased investment. Nearly 60% of respondents agree that the Commission’s proposal will accelerate investments in the EU. Respondents from the banking sector are particularly optimistic; as many as 74% of them expressed this opinion. In the case of respondents from academia and think tanks, around 50% agreed with the statement, more than 20 pp less.

“That depends very much on quality of governance and the ability to use the additional resources for investment,” said Jaromir Baxa, professor atf Charles University in Prague.

The final question was to evaluate Commission’s proposal against a more restrictive reform plan. Germany’s Finance Minister Christian Linder has proposed a more restrictive reform with gradual, but systematic, debt reduction and the introduction of binding Medium Term Objectives over the business cycle, usually at 0.5-1.0% of GDP. Respondents were asked whether this would have a positive effect on the EU’s potential to generate GDP growth. Just 17% of respondents expect this effect. The bankers were the most pessimistic: just 11% of them expect faster growth. The academics were more optimistic, but even in this group, just 28% of respondents expect better economic performance.

“I am not against reducing public debt and the fiscal deficit. I think that many government subsidies are useless and many taxes too low […] but Lindner’s proposal is far too rigid,” said Eric Monnet,  professor at the Paris School of Economics.

The panel’s results indicate that reform is necessary. The old fiscal rules were ineffective and allowed debt to rise above the 60% of GDP limit. The challenge, however, is to simultaneously reduce debt and provide fiscal space for increased investments. Achieving these two goals at once may prove very difficult.“– said Jakub Rybacki, Head of Macroeconomic Team at Polish Economic Institute.

“The comments show how complex the issue of fiscal rules reform is. There is the question of the relevant alternative, and there is still a lot of uncertainty around the interpretation of the suggested new rules. Increased flexibility can potentially improve economic outcomes but is prone to political interference and raises the risk that ultimately irresponsible fiscal policies can be pursued.”– said Klaus-Jürgen Gern, Head of Economic Outlook, Kiel Institute for the World Economy.

About our panel

The European Economists Panel is a new initiative started jointly by the Polish Economic Institute (PEI) and the Kiel Institute for the World Economy (IfW Kiel). Our aim is to bring together leading economists from academia, think tanks and the business sector to discuss issues relevant to EU policy. We want to strengthen the economic debate within the EU, with an emphasis on current challenges and dilemmas.

Our goal is to ensure pluralism, with representativeness of all the EU member states. To meet this objective, we invited a large number of economists with a range of different backgrounds. Currently, our panellists include professors from Europe’s top universities, representatives of major think tanks and non-profits, economists from major commercial banks, and former members of monetary policy councils. We intend to increase the number of panellists in the coming months.

The panel will be conducted on a monthly basis. Each month, we will ask the panellists three questions concerning a current economic issue. They will be asked to evaluate solutions on a five-point scale, from “strongly disagree” to “strongly agree”. They will also have the space to write a short commentary. The full results and further information on the Panel are available here.

About us:

The Polish Economic Institute (PEI) is a public economic think tank dating back to 1928. Its research areas are primarily macroeconomics, energy and climate, foreign trade, economic foresight, digital economy and behavioural economics. The Institute prepares reports, analyses and recommendations on key areas of the economy and social policy in Poland.

The Kiel Institute for the World Economy (IfW Kiel) is the leading research institute in Germany for globalization issues. Its researchers investigate the drivers and effects of international economic activity, the integration and disintegration of global markets as well as the opportunities and limits of political action in open economies.

See European Economic Panel website: https://eep.pie.net.pl/en/eep/

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