Does the euro zone need a fiscal rule?

Since the beginning, the euro zone has opted for a fiscal rule. Today, euro-zone countries’ fiscal deficits cannot exceed 3% of GDP and their structural fiscal deficits cannot exceed 0.5% of GDP. We note that some countries (France in particular) would like to ease this fiscal rule in light of very low interest rates and the need for public investment. This raises a fundamental question: does the euro zone need a fiscal rule? The initial idea in the 1990s was that an excessive fiscal deficit in one country exerted a negative externality (a negative effect on well-being) on the other countries, by driving up interest rates in the euro zone as a whole. The reality turned out to be quite different: In normal times, a higher fiscal deficit in one euro-zone country generates a positive externality for the other euro-zone countries, since activity in this country is stronger and it imports more; There is market discipline: if a country has an excessive fiscal deficit, its interest rates rise (and not those of the euro zone as a whole), which gives it an incentive to reduce its fiscal deficit without the need for a rule. One might therefore think that the euro zone’s fiscal rule is pointless. But there remains the case of a fiscal deficit that is so high that it triggers a crisis: the country is no longer able to finance itself and faces very high interest rates. Its fiscal deficit then exerts a negative externality on the other countries, which: Have to bail out the country in difficulty (ESM loans, purchases of its government bonds by the European System of Central Banks); H ave to accept an abnormally low euro-zone interest rate as a result of the monetary policy response to the crisis. This shows that a fiscal rule is both necessary and that it must be used to ensure that the countries do not become fiscally insolvent and succumb to a debt crisis. The maximum fiscal deficit compatible with continued fiscal solvency must therefore be calculated for each euro-zone country.