Reform of the Stability and Growth Pact in Europe: The optimum and the feasible

The “new” Stability and Growth Pact of the European Union (the new fiscal rules) must be based on the public debt sustainability condition. But in reality, this condition is complicated: It depends on monetary policy (the position of long-term interest rates in relation to the growth rate); There is uncertainty regarding future primary fiscal surpluses, so a risk premium is used in the calculation; The debt sustainability condition is specific to each country (each country has a specific yield spread and specific potential growth); We must take into account the effect of different types of public spending, taxes and public investments on potential growth, and the effect of the various structural policies implemented on potential growth. We see the difficulties associated with the implementation of this "optimal" fiscal rule: It requires coordination between fiscal and monetary policies; It requires quantifying the uncertainty about future fiscal balances; It leads to a specific rule for each country, which raises problems of governance and asymmetry of treatment between small and large countries; It requires reliable measurement of the effects, at a detailed level, of different public spending, tax revenues and structural policies on potential growth . It is therefore to be feared that this optimal rule will be impossible to achieve, and that a "second best rule" will have to be introduced: Which is the same for all countries; Which defines a list of investments (including investments in the energy transition, even if they do not generate GDP except in the very long term, and additional tax revenues) that can be financed by public debt; Which is based on a "reasonable" but exogenous assumption of interest rates and potential growth.