The European Fiscal Board’s first report and the future of the EU’s fiscal framework

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Series Details 29.11.17
Publication Date 29/11/2017
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The European Fiscal Board (EFB) is an independent advisory body of the European Commission.

The Board was set up following the Five Presidents' Report 'Completing Europe's Economic and Monetary Union' of October 2015, with the aim to strengthen the current economic governance framework of the eurozone.

The main responsibilities of EFB are

+ provide to the Commission an evaluation of the implementation of the Union fiscal framework and the appropriateness of the actual fiscal stance at euro area and national level
+ make suggestions for the future evolution of the Union fiscal framework
+ advise the Commission on the prospective fiscal stance appropriate for the euro area as a whole based on an economic judgment, as well as the appropriate national fiscal stances, within the rules of the Stability and Growth Pact
+ cooperate with the National Independent Fiscal Councils
+ provide ad-hoc advice on request of the Commission President

On 15 November 2017, the European Fiscal Board (EFB) published its first annual report. The report reviewed the way the EU fiscal framework has been implemented, highlighting imperfections and scope for improvement. At the same time it concluded that the framework contributed to the stability of the euro area. In exceptional times when risks to the sustainability of public finances in several euro area Member States were coupled with risks of deflation, the short-run response to explore the flexibility of the Stability and Growth Pact (SGP) made sense though it raised concerns about the integrity of the fiscal framework. Looking ahead, the challenge will be to adapt the fiscal framework to the return of normal and good economic times, while building the buffers necessary to withstand future crises.

The EFB's first report provides a comprehensive and independent assessment of how the SGP has been applied in the recent past. The focus is on the last complete surveillance cycle, 2016. The assessment shows how sizable compliance gaps in budgetary plans of euro area countries had largely disappeared ex post, as Member States benefited from existing degrees of discretion and greater flexibility under the SGP. Although nominal GDP growth had largely come in as expected or even lower, only few euro area countries were found to significantly deviate from the required fiscal adjustment. Those who did deviate were granted additional time and sanctions were cancelled.
In this blog the authors to critically reflect on the economic governance system the global financial crisis brought about, and on the actions carried out by the EU institutions and the Member States within that setting.

The crisis precipitated a substantial upgrade of the rules making up the European fiscal discipline, and an unprecedented strengthening of the surveillance paradigm in the field of budgetary affairs. Since it entered into force, this new normative catalogue introduced mainly by the Six-Pack and the Two-Pack reforms, as well as its main enforcer, i.e. the European Commission, have attracted a great deal of criticism (from the European Central Bank (ECB), the International Monetary Fund and some Member States).

The latest blow has come from the newly established European Fiscal Board (EFB), which issued its first annual report in November 2017.

The EFB presented a mixed picture of the current regulatory framework, and the Commission’s action as its guardian. It focused on three issues: an evaluation of the implementation of the EU's fiscal framework, a review and assessment of the fiscal stance for the euro area as a whole, and the identification of best practices in the functioning of national fiscal councils. It concluded with some suggestions on the future evolution of the EU’s fiscal framework.

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Related Links
European Commission: Business, Economy, Euro: Economic and fiscal policy coordination: The European Fiscal Board (EFB)
European Commission: MEMO/17/3481 (19.10.16): The European Fiscal Board: Questions and Answers
European Commission: Publications: 2017 annual report of the European Fiscal Board

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