Shelby Thordarson, Evan Frohman, Elena Campario, Jose Alvarez Defense of the current fiscal rule (and fiscal rules in general) The existence of strong fiscal policy rules improves the economic environment of the European Union. A strong fiscal policy provides four main benefits to EU member states: promotion of cohesion on the economic plane, prevention of one country ruining other countries’ economies, encouragement of long-term stability, and reduction in the ability of governments to act strategically. The first advantage of maintaining close economic relationships aligns with Schuman’s original concept of a thoroughly united Europe. With supranational fiscal rules, each member state must prescribe to the same set of policies and thus uphold similar approaches to their economic woes. The common ground this stimulates closer ties among member states. Secondly, fiscal rules also inhibit one country from accruing so much debt or such excessive levels of inflation that the economies of every other country in the EU are wounded. By requiring member states to sustain healthy balances of debt, deficit, inflation, and interest rates, fiscal rules reduce the ability of a single country to devalue the Euro in hopes of improving its own economy while simultaneously harming every other country’s economy. The third benefit of a strong fiscal policy, the promotion of long-term stability, is crucial for governments during political transitions. Parties with opposing views cannot abruptly change a country’s fiscal policy after an election; this generates a constant environment in which investors know what to expect of the economy. Finally, fiscal rules hinder governments’ attempts to act strategically during elections. Without fiscal rules, politicians could alter factors to “improve” the state of the economy and, therefore, the presence of fiscal rules produces more economically honest elections. George Koptis emphasized, “rational governments are prone to use suboptimal discretionary policies to enhance their chances for re-election.” [2] Despite the aforementioned benefits of a sound fiscal policy, its status in the EU remains a point of discussion and debate. This is mainly due to three reasons, each with potential solutions. The first proposed problems of fiscal policy are government compliance. In Britain in 2002, the government disregarded the regulations claiming special case, rendering the fiscal rules useless, leaving the country ill prepared for the crisis[3]. However this is not an argument against fiscal policy but rather a case for more regulated fiscal policy so that governments cannot dodge the rules. A supranational institution such as the EU is able to enforce unpopular economic rules as we saw in Greece (with austerity measures, not before them). The second complaint, the bureaucracy adds unnecessary rules that reduce transparency is again only partly correct. While fiscal policy does add more layers of institutions, it can be done with transparency as articulated later in this paper. Furthermore, the argument that fiscal policy rules from an independent institution are unnecessary results in arguing that governments will not act strategically to get elected.

The third argument, that strong fiscal policy can trap countries into being unable to act in times of economic shock can be easily remedied by an escape clause given certain parameters[4]. The complaints against the current fiscal policies are execution issues, not theoretical ones. They are problems that can be solved by an improved system. One common objection to fiscal rules is that, by their very nature, they invite abuse and are doomed to be ineffective. Typically, they induce nontransparent behavior, largely through creative accounting practices to circumvent the rules. First, to enhance their usefulness, fiscal rules need to be well designed at national and subnational levels of government, combining simplicity, flexibility, and growth-oriented criteria. They also must be implemented in a transparent manner, with the support of an appropriate institutional infrastructure (especially as regards the budgetary process and surveillance mechanism), and following careful preparation and convergence. It is widely recognized that transparency is conducive to successful fiscal policy whether in the context of rules-based or of discretionary policymaking. As rational governments are prone to use suboptimal discretionary policies to enhance their chances for re-election, rather than maximize social welfare (thus by exploiting an information advantage vis-à-vis the electorate), rules could prevent such an outcome if they are accompanied by transparency requirements to reduce or eliminate information asymmetry. Τherefore, we should establish a depoliticized framework for fiscal policy (like the depoliticization of monetary policy under inflation targeting). Another aspect is about structural reforms, which promote better functioning labor and product markets and should thus be more encouraged. In the present juncture, fiscal consolidation and ‘reform responsiveness’ go hand in hand. Structural reforms can alter not only the efficiency with which economies respond to shocks, but also the distribution of the effects. We can also think of the potential attraction of a "fiscal capacity" at the central level, in the form of a stabilization instrument, which could improve the conduct of fiscal policies throughout the cycle by enforcing tighter policies in good times, and could strengthen the existing automatic stabilizers while maintaining a credible rule-based framework. The flexibility criterion is also relevant for the design of subnational fiscal rules and has to be thought, especially as regards the treatment of asymmetric shocks. Shocks that are concentrated in certain regions could be compensated with cyclically adjusted rules and contingency funds at the subnational level, or with intergovernmental transfers. (For instance, within the EU, besides the provision of waivers from the deficit reference value in case of a significant recession, Structural and Cohesion Funds are made available to member countries on the basis of regional need as well as vulnerability to shocks). Finally, the sanctions for noncompliance with the rules could also be reinforced in order for the system to be more efficient.

[1] Binding the Hands of Government: A Credible Fiscal Rule for the UK. Dupont and Kwarteng, 2012 [2] Fiscal Rules: Useful Policy Framework or Unnecessary Ornament?. Koptis 2001 [3] The Impact of the European Union Fiscal Rules on Economic Growth. Castro 2011.




[4] Fiscal Rules: Useful Policy Framework or Unnecessary Ornament?. Koptis 2001.