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A proposal to revive the European Fiscal Framework. Bruegel Policy Contribution ISSUE 2016/07 MARCH 2016

Claeys, Grégory and Darvas, Zsolt and Leandro, Alvaro (2016) A proposal to revive the European Fiscal Framework. Bruegel Policy Contribution ISSUE 2016/07 MARCH 2016. [Policy Paper]

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    Abstract

    Pro-cyclical fiscal tightening might be one reason for the anaemic economic recovery in Europe, raising questions about the effectiveness of the EU’s fiscal framework in achieving its two main objectives: public debt sustainability and fiscal stabilisation. • In theory, the current EU fiscal rules, with cyclically adjusted targets, flexibility clauses and the option to enter an excessive deficit procedure, allow for large-scale fiscal stabilisation during a recession. However, implementation of the rules is hindered by the badly-measured structural balance indicator and incorrect forecasts, leading to erroneous policy recommendations. The large number of flexibility clauses makes the system opaque. • The current inefficient European fiscal framework should be replaced with a system based on rules that are more conducive to the two objectives, more transparent, easier to implement and which have a higher potential to be complied with. • The best option, re-designing the fiscal framework from scratch, is currently unrealistic. Therefore we propose to eliminate the structural balance rules and to introduce a new public expenditure rule with debt-correction feedback, embodied in a multi-annual framework, which would also support the central bank’s inflation target. A European Fiscal Council could oversee the system.

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    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > fiscal policy
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on/reforms/economic governance
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Policy Contributions
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 29 Mar 2016 09:55
    Number of Pages: 20
    Last Modified: 29 Mar 2016 09:55
    URI: http://aei.pitt.edu/id/eprint/73826

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