New Fiscal Rules for the EU

Public funding plays an important role to meet the massive investment needs required to realise a green and just transition. However, EU Member States are constrained by both national and European fiscal rules. Thus, there is a current and active debate about their reform and a proposal by the European Commission is expected in November 2022.

In this context two proposals are being intensely debated, namely an expenditure rule and a so-called (green) golden rule. Using macroeconomic data for Germany, the Netherlands, and Italy, ZOE has simulated the effects of specific rule designs with respect to EU Member States with contrasting public budget circumstances.

Concerning the expenditure rule, the results suggest that how the debt correction factor is designed is crucial in determining the fiscal leeway granted to Member States. This analysis also shows the striking effects that a higher interest rate would have on public budgets. While all golden rule proposals provide additional fiscal leeway, the pressing point is a potential cap for deductible investments.

Additionally, the analysis shows that the mere implementation of an expenditure rule and a golden rule is insufficient to ensure the scale or quality of investments and spending for a successful green and just transition. Therefore, the analysis concludes with a presentation of proposals to rethink the EU economic governance framework for getting EU fiscal policy on track for a green and just transition.

Feel free to watch the recording of the publication’s webinar from 03 November 2022 (Youtube) and download the webinar’s slides.