2017 annual report of the European Fiscal Board

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. Thanks to the additional margins of flexibility under the SGP, the fiscal stance for the euro area was broadly appropriate in 2016, though not its distribution across countries. From a euro-area perspective, the general orientation of fiscal policy was loose or looser than warranted in countries where the sustainability analysis was less favourable; it was restrictive or more restrictive than warranted in countries where the sustainability analysis did not indicate particular constraints. Successive reforms and additional elements of flexibility have increased the complexity of the SGP. The instances where judgment and discretion play a crucial role have multiplied, raising questions of transparency and equal treatment. While simple rules can be blunt and are equally strict or lax for everyone, discretion cannot guarantee the same degree of acumen across all cases. The growing importance of judgment and discretion also heightens frictions between different institutional players at the EU level over who ultimately sets the course within the range of options created by discretion. To be clear, discretion as such is not the issue. What matters is how discretion is exercised: on the basis of economic reflections or other considerations. Based on its assessment of how the SGP was applied, the EFB puts forward a number of proposals. The proposals aim at (i) creating incentives for governments to take advantage of good economic times to improve public finances, (ii) enhancing the enforcement of the rules, (iii) strengthening the effectiveness of national fiscal councils, (iv) encouraging Member States to implement structural reforms to strengthen economic resilience, and (v) simplifying the SGP while safeguarding enough flexibility with independent judgment. The EFB also contributes to the debate on how to deepen the Economic and Monetary Union. It is of the view that, under certain conditions, a centralised fiscal instrument would add stability to the euro area in times when monetary policy reaches its limits. The option of implementing an investment protection scheme appears in the short run to be superior to the alternatives.