The rules that govern fiscal policy in the eurozone should be
simplified to ensure that member governments cut their debts,
economists at the International Monetary Fund said in a paper
published Friday.
The rules, enshrined in the 1997 Stability and Growth Pact, are
intended to ensure that national governments don't take advantage
of their membership of the eurozone to borrow excessively, and
thereby threaten the stability of the currency area.
But the rules have been regularly flouted since the euro was
launched in 1999 and failed to prevent surges in borrowing that
contributed to the currency area's debt crisis, which began in 2010
and continues to this day as Greece seeks an agreement with the
rest of the eurozone and the IMF that would enable it to repay its
debts.
A number of reforms to the rule book have followed in the years
since the crisis, increasing its complexity without securing full
compliance, the most recent changes coming earlier this year.
In the paper published by the IMF, seven of its economists said
the very complexity has made it difficult to ensure governments
pursue fiscal policies that will reduce their debt levels over the
medium term.
The combined debts of the eurozone's member governments rose
again in 2014, reaching 91.9% of gross domestic product, compared
with an upper limit under the budget rules of 60%.
"Compliance remains weak," the economists wrote. "This reflects
the complexity of the framework, which has resulted in both
unintended violations and the exploitation of loopholes, and has
gone hand-in-hand with weak enforcement."
The IMF economists also said the long-standing requirements that
budget deficits don't exceed 3% of gross domestic product and that
government debt should fall toward 60% of GDP are no longer
consistent with each other.
The damage inflicted by the financial and debt crises mean the
eurozone's growth potential is much lower than it was when the
rules were set down, so even deficits as low as 3% of GDP won't
deliver the desired reduction in debt ratios. In fact, debts will
probably rise if deficits aren't lower.
"This implies a 100% of GDP debt level over the medium-term,
resulting in an inconsistency between the existing debt and deficit
targets; in other words, the action path implied by the deficit
target diverges from that required by the debt target," the
economists wrote.
The IMF economists considered a range of alternative, simpler
rules for fiscal policy, and concluded the best option would be a
limit on the growth of government spending calibrated to bring down
government debt as a share of economic output.
"Expenditure rules are more directly related to the formulation
of the annual budget, which sets legally binding spending
appropriations, thereby providing clear operational guidance to
policy makers," they wrote. "Second, expenditure rules are less
complex and therefore easier to communicate and monitor."
The IMF economists accept that the proposed reforms will take
time to implement, since they would likely face legal challenges
and may even require changes in the European Union's treaties.
But they said the effort would be worth it if it helps ensure
the eurozone can continue to exist.
"Working for a simpler and more robust fiscal framework may be
the best response to recent skepticism about the European project,"
they wrote.
The IMF noted that while it published the paper, the analysis
presented within it isn't its official policy.
Write to Paul Hannon at paul.hannon@wsj.com
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