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fiscal rules

  • Wednesday 10/7/2019

    As an open economy, the euro area feels the consequences of the worldwide economic slowdown. But markets are not just pricing in a cyclical slowdown. Instead, interest rates and inflation expectations are reflecting a prolonged period of low structural growth and inflation. If markets are right, this would mean a secular stagnation. Just like Japan experienced since the bursting of its asset bubbles in the early nineties.

    Undoubtedly, there are some similarities between Japan and the euro area. Among others, an ageing population, issues within the banking sector or higher private savings. On the other hand, the euro area (until now) avoided the deflationary environment. And it still has policy room to avoid a straightforward ‘Japanification’ of its economy.

  • Tuesday 5/2/2019
    Vitor Gaspard

    Fiscal rules are important commitment devices to limit fiscal profligacy. They have been an integral part of the euro area architecture and were introduced to insure against weaknesses in the functioning of the market discipline. Nonetheless, they have failed to provide sufficient fiscal discipline and avoid excessive market volatility. However, despite prevalent noncompliance, rules did –on average– influence the behavior of fiscal authorities. The evidence shows that well-designed rules worked better than others. Elevated debt levels and the record of weak compliance and lax enforcement make fundamental reform of the EU fiscal rules more urgent than ever. These reforms should aim at making the rules simpler and more transparent, and better aligning political incentives with rule compliance.