Europe's New Fiscal Rules

Europe has put in place a new system of complex fiscal rules. These include the so-called “six pack” to upgrade the Stability and Growth Pact and a new Treaty incorporating the “fiscal compact”. Much of the discussion about the new rules has been procedural or theoretical. This paper shows what the rules will mean in practice under a medium-term scenario developed by the OECD. So far, fiscal consolidation has largely been driven by the recent wave of Excessive Deficit Procedures. Only once these commitments have been fulfilled will the new system of rules come into action. Its pillar will be the requirement to balance budgets in structural terms. The rules imply a tight fiscal stance over the coming years for many European countries by historical standards. Almost all countries will have to be as disciplined as the few countries that managed to make meaningful progress in tackling high debt levels in the past. Over the very long term, the rules imply extremely low levels of debt. Thus, the requirements are not likely to be permanent. The rules are complex. The methodology to calculate the structural balance has a number of weaknesses and discretion will be needed in implementing the rules.