What is the case for limiting fiscal deficits and public debt ratios for euro-zone countries?

Until the COVID crisis, the euro-zone countries had agreed to strict fiscal rules: fiscal deficits were capped at 3% of GDP, structural fiscal deficits at 0.5% of GDP; public debt ratios were required to return towards 60% of GDP. The crisis has erased these rules. But should they be reinstated after the crisis? It is important to ask whether there is a serious case to limit fiscal deficits and public debt ratios. The conventional argument cites negative externalities: if a country has an excessive fiscal deficit, this drives up euro interest rates and therefore interest rates in the other countries. This argument makes no sense: it is countries’ sovereign risk premia that rise . Another argument is that a euro-zone country with an excessive fiscal deficit ends up succumbing to a debt crisis, which forces the other countries to prop it up , resulting in another form of negative externality. In fact, the crisis that is triggered is a balance-of-payments crisis: it is important to distinguish a fiscal deficit that is the counterpart of excess domestic savings from one that leads to external debt (like in Greece until 2012). A third argument is that excessive public debt drives up long-term interest rates in the country concerned, and that this forces the ECB to intervene with government bond purchases and money creation: fiscal rules would prevent “fiscal dominance”, i.e. the constraint on monetary policy to ensure fiscal solvency. But if the public debt , even a large one, is the counterpart of excess domestic savings, there is no reason for it to drive up long-term interest rates. Last, there is a legitimate question as to whether the euro-zone countries need an external balance rule as opposed to a fiscal rule. Preventing excessive external debt would prevent balance-of-payments crises and rising long-term interest rates in the event of a high fiscal deficit. Obviously, this would require one to renounce the belief that high capital mobility between the euro-zone countries could permit persistent external deficits to be maintained.