Philip R Lane: The future of the EU fiscal governance framework - a macroeconomic perspective

Panel intervention by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the European Commission webinar on "The future of the EU fiscal governance framework", 12 November 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I welcome the opportunity to contribute to the discussion on the future of the EU fiscal governance framework. In what follows, I will offer some personal observations.

I will focus on the macroeconomic role of the Stability and Growth Pact (SGP), taking a euro area perspective. The SGP is of course just one component in the overall institutional architecture of the EU. In particular, the completion of the banking union and capital markets union would improve the euro area's capacity to absorb macro-financial shocks, which would also serve to reduce fiscal tail risks. A comprehensive and robust macroprudential policy framework can also significantly reduce the burden on national fiscal policies and monetary policy in terms of macro-financial stabilisation. In addition, a permanent central fiscal capacity would enhance macroeconomic stabilisation by facilitating a common area-wide response to common shocks and (depending on its design) would also be complement national fiscal policies in managing large-scale country-specific shocks. Launched as a specific response to the pandemic crisis, the Next Generation EU (NGEU) initiative is testimony to the effectiveness of (at the least) a state-contingent type of central fiscal capacity in the face of large adverse shocks.

At a conceptual level, it is clear that both price stability and macroeconomic stability simultaneously require that fiscal positions are sustainable and that fiscal policy operates in a countercyclical manner. Over the past twenty years, the macroeconomic performance of the euro area has suffered both from episodes of fiscal sustainability problems in some member countries and from fiscal procyclicality (in both good and bad economic times). Of course, fiscal sustainability and fiscal countercyclicality are interconnected: it is not possible to respond counter-cyclically to a recessionary shock if debt sustainability is called into question. In turn, debt sustainability requires the commitment to act counter-cyclically also during periods of strong economic performance by reducing debt ratios and building up fiscal buffers. The procyclical nature of fiscal policy in the euro area during substantial phases of the first two decades of the euro (pre-pandemic) is clearly evident in Chart 1.