Volker Wieland recommends strengthening EU fiscal rules
„The need for strengthening resilience and fiscal capacity for unexpected circumstances is highlighted by the ongoing war between Russia and Ukraine that is triggering major changes in European security architecture and energy policy“, stresses Wieland.
In the study titled „Overview of how major economies have responded to the Covid-19 pandemic“, Wieland analyzed the scope, type and effects of fiscal support measures in major economies with a special focus on debt sustainability. To this end, he examined measures that differ across countries such as direct grants, cash transfers, tax deferrals and tax relief, loan moratoria, public loan guarantees, public loans, as well as job retention schemes but also support measures at the euro area and EU level.
According to Wieland, a speedy reaction to the onset of the pandemic such as the European Central Bank’s (EBC) PEPP program is essential. „In the euro area, in particular, the quick response by monetary policy helped protect banks‘ and governments‘ funding costs.“
However, he stresses that it is important to phase out support measures as the economy recovers. Eventually, the ECB indirectly competed with and substituted fiscal support from the European Stability Mechanism (ESM) and loans available via the Recovery and Resilience Facility of the European Commission, Wieland writes. Instead, the ECB could have tied the scale of purchases to governments drawing on ESM and EU loans. „As the recovery took hold in the second half of 2020 and 2021, greater weight should have been given to the fiscal support mechanisms on the European level instead of the ECB’s PEPP program.“
As central banks have revised up their inflation forecasts for 2022 and subsequent years and higher interest rates are quite likely in the medium- to longer-run, in his view, it is necessary to contain and consolidate high-debt ratios as the member state economies further recover from the coronavirus crisis. In his analysis, Wieland shows that the ECB could raise central bank rates as needed, without destabilizing government finances in high-debt countries such as Italy, France, or Spain.
In order to build resilience among EU member states against future downturns and crises, the complex European fiscal framework needs to refocused, Wieland argues. He comes back to a proposal of the German Council of Economic Experts (GCEE) to reduce the number of exceptions and the degree of discretion. This proposal includes a debt reduction factor that kicks in with high debt, such that in good times government expenditure grows more slowly than potential GDP.