In 2002, Romano Prodi called the Stability Pact established to ensure fiscal orthodoxy and discipline in the euro zone “stupid.” Although the pressures made the then president of the European Commission rectify almost immediately, the truth is that 20 years later time has proved him at least partially right. The rigid objectives of 3% deficit and 60% debt as a one-size-fits-all for all countries without distinction have shown such inefficiency that right now this European fiscal framework is under review and the European Commission is expected to present its proposal at the end of this month or early November
It changes so much because its complexity grew disorderly over time, given that new superimposed elements were added to it year after year; as well as the high degree of non-compliance that it has always registered. Spain spent 10 years with an open excessive deficit procedure and its case was not the exception, but rather part of the norm. Even the big ones, like Germany and France, were also filed by a mechanism if not stupid, not very effective.
Now, with fiscal rules still suspended due to the pandemic, a new framework is being designed for which the Independent Authority for Fiscal Responsibility (Airef) presented its proposal yesterday. Basically, it consists of establishing what the independent control bodies ask for the most: a medium and long-term path of obligatory objectives in budgetary matters. This is what they regularly ask the Spanish government for, now in the form of a proposal to reform European fiscal rules.
Regarding the current system, what the Airef proposes involves three major changes. They are specific paths for each country, and not a unique model for all; it is planned for the four years of the legislature, and not for years; and it works with long-term debt, and not with the deficit, which until now has been taken into account.
The problems that the fiscal authority detects in the current governance mechanism are that it works with short-term and volatile objectives, with nominal deficits, and with little protagonism of the governments when establishing the fiscal path, which reduces their responsibility, since the initiative belongs to Brussels.
Based on this diagnosis, what he proposes is that at the beginning of the legislature, each government sets a spending path for the next four years. Some objectives that the Government would decide and should be approved by the European authorities. It would be a binding reference, although it could be modified in the event of a change of government or with an escape clause linked to a context of strong recession or exceptional circumstances.
In this way, the operation of the recovery plan is replicated, where it is each government that sets its objectives by negotiating them with Brussels. A formula that, for the fiscal authority, increases the political cost of failing to comply with what has been promised.
To be exact, what Airef proposes is that each incoming government sets a specific debt anchor for its country, taking into account the starting levels (the present); the historical evolution of the ratio (the past) and the trend projections of public income and expenditure (future). It is a debt ceiling as a long-term objective, from which the path of primary spending to be followed would be set.
