The European fiscal governance framework: overview and evaluation

In contrast to monetary policy, the fiscal policy of the euro area countries has remained a national competence. Since it is important for the countries belonging to the Economic and Monetary Union to aim at fiscal discipline, the Maastricht Treaty and the Stability and Growth Pact made provision for establishing a European governance framework for public finances, accompanied by binding fiscal rules. The framework is one of the cornerstones of EMU, and it is vital that Member States comply with the rules for that union to work well. The article discusses the European governance framework for public finances and subjects it to a critical appraisal. Section 1 looks at the importance of fiscal rules in general, and especially in a monetary union. Section 2 outlines the main stages in the creation of the European budgetary framework. Section 3 describes the current framework. Section 4 details the way in which the European budgetary framework has been applied in recent times. Section 5 presents an appraisal. The European fiscal governance framework has evolved since the foundations were laid by the requirements concerning fiscal surveillance set out in the 1992 Maastricht Treaty. These changes have made it smarter but at the same time they have also increased its complexity. Since the start of European Monetary Union, the most important rules of the Stability and Growth Pact have often been broken. That is undeniably the result of the rather weak support for strict compliance with the rules in some countries, but is also due in part to the complexity of the fiscal rules and the lax supervision over their implementation. Although the measures taken to tighten up the framework over the period 2011-2013 improved public finances in many Member States, there are still many countries, including Belgium, that need to make additional efforts to comply with the fiscal rules. In the short and medium term, the rule-based framework needs to be correctly implemented. In the long term, it is desirable for fiscal policy to become more centralised but that requires more macroeconomic and social convergence, and fundamental steps towards political union. The Five Presidents’ Report published at the end of June contains a number of interesting proposals and in any event forms a good starting point for the reform of the budgetary framework.