Member Spotlight
Covid Shows That Europe’s Fiscal Rules Are Outdated
Bloomberg
|
Tue, Feb 2, 2021
by
Elga Bartsch
Body
One upshot of Covid-19 has been closer coordination between monetary and fiscal powers. This has led to a revolution in macroeconomic policy — one that countries should continue building upon. Just as central banks have been rethinking their frameworks, there is a strong case for governments to similarly reconsider their approach to fiscal policy.
Europe now has the perfect opportunity to do so: The stringent rules of the European Stability and Growth Pact, which limits the fiscal policies of euro-area member states, are suspended until 2022. This gives the bloc time to establish a new fiscal regime that can both stabilize economic activity and address long-term challenges such as climate change.
There is little doubt that governments must play a more active role in getting Europe’s economies back on track. The relentless decline in equilibrium interest rates has curtailed what the European Central Bank can do, and it’s hard to believe that these will go up significantly anytime soon. With rates and a considerable share of government bond yields already in negative territory, the euro area is unlikely to return to full employment without additional fiscal spending.
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Covid Shows That Europe’s Fiscal Rules Are Outdated
Bloomberg | Tue, Feb 2, 2021
by Elga Bartsch
One upshot of Covid-19 has been closer coordination between monetary and fiscal powers. This has led to a revolution in macroeconomic policy — one that countries should continue building upon. Just as central banks have been rethinking their frameworks, there is a strong case for governments to similarly reconsider their approach to fiscal policy.
Europe now has the perfect opportunity to do so: The stringent rules of the European Stability and Growth Pact, which limits the fiscal policies of euro-area member states, are suspended until 2022. This gives the bloc time to establish a new fiscal regime that can both stabilize economic activity and address long-term challenges such as climate change.
There is little doubt that governments must play a more active role in getting Europe’s economies back on track. The relentless decline in equilibrium interest rates has curtailed what the European Central Bank can do, and it’s hard to believe that these will go up significantly anytime soon. With rates and a considerable share of government bond yields already in negative territory, the euro area is unlikely to return to full employment without additional fiscal spending.