ECB Researchers Say European Fiscal Rules Need Reality Check

(Bloomberg) --

The European Union should adapt its fiscal rules to a world where growth and interest rates are low and more government spending is needed, according to European Central Bank researchers.

The EU’s framework that asks governments to limit debt to 60% of economic output, has often been criticized as a corset forcing high-debt member states into counterproductive austerity, limiting their ability to stimulate growth through increased spending. Such behavior risks triggering a vicious circle of spending cuts, slower growth and yet bigger debt loads.

ECB researchers Sebastian Hauptmeier and Christophe Kamps made two proposals to overhaul current regulation: The region’s debt rule should account for persistent deviations of inflation from the central bank’s objective, and more time should be allowed to adjust to it.

Focusing the fiscal framework on the achievement of a debt target -- as opposed to a ceiling -- would also create more space to finance public investment, they argue. In this way, fiscal policy could support the central bank, an argument the ECB has sought to drive home for months as its leeway to add stimulus diminishes.

“A symmetric treatment of the 60% of GDP reference level, by implying convergence toward the fiscal anchor also from below, may be an alternative way to create budgetary room,” Hauptmeier and Kamps wrote in their working paper. “It could also be useful in a situation where monetary policy reaches the effective lower bound and debt dynamics move toward an undershooting of the debt target. “

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