The major challenge of defining new fiscal rules in Europe

Defining new fiscal rules in Europe will run into three major challenges: Returning to a debt objective seems unrealistic, given the very high level of public debt ratios in some countries and the myriad new public spending needs; the only feasible scenario is a very slow reduction in public debt ratios if interest rates remain lower than growth rates. It will therefore probably be necessary to settle for a fiscal deficit objective; It has been proposed that the fiscal rules be country-specific, dependent on countries’ structural problems and specific needs for public spending and investment. But it seems unrealistic to have one fiscal rule for each European country, which would be too complicated and divisive ; The consensus is that debt financing should be allowed for public spending and investment that has a positive effect on long-term growth. But the difficulty then lies in determining what this public spending and investment is at a granular, operational level. To be clear, it is very difficult to know exactly what specific public spending has a significant positive effect on investment. Altogether, one may reasonably think that: There can be no public debt ratio rule; The fiscal rules will be the same for all countries; It is very difficult to draw up a list of public spending and investment that boost s long-term growth. Large countercyclical increases in fiscal deficits must also be permitted during recessions. The rules should therefore move towards a n across-the-board increase in the structural fiscal deficit ceiling (currently 0.5% of GDP), possibly conditional on a sufficient volume of “green” public spending, which may be acceptable to all countries.