2019 annual report of the European Fiscal Board

The report provides a comprehensive and independent assessment of how the SGP was applied in the last complete surveillance cycle, 2018. Economic growth in 2018 turned out relatively strong, albeit slowing down in the second semester. Although it was in line with the expectations of spring 2017, many perceived the growth outturn as disappointing by comparison with the strong momentum of 2017 and after an intermediate period of more optimistic forecasts. Growth was unexpectedly job-rich and tax revenues turned out higher than planned. As a result, on aggregate fiscal positions improved more rapidly than expected, with the aggregate deficit reaching a historical low in both the EU and the euro area. On aggregate, the structural primary balance improved marginally. However, a large share of the unexpectedly high tax revenues was located in countries that already had fiscal space; and most of the countries that needed to reduce their high debt levels spent their higher revenues, if not more, instead of building fiscal buffers. Therefore, their fiscal position deteriorated or did not improve by as much as required. For the euro area as a whole, the relatively vigorous pace of expenditure growth net of revenue measures actually signals that fiscal policy was overly expansionary. During the 2018 fiscal surveillance cycle, the Commission applied a ‘margin of discretion’ on top of existing flexibility, reducing fiscal requirements for two Member States. When assessing compliance with requirements, it also used various elements of discretion to justify not drawing conclusions or taking corrective measures against several Member States for which there were serious signs of significant deviation. In this context, useful interventions by some national independent fiscal institutions (IFIs) helped strengthening transparency and accountability in individual Member States. More generally, IFIs could play a more effective role if they all were to meet an EU-wide set of minimum standards ensuring that they have sufficient means, independence and impact. The 2018 experience provides a good illustration of more general weaknesses in the EU fiscal framework and its implementation, as the EFB highlighted in its recent Assessment report. To overcome issues of complexity, opacity, poor compliance and political interference, the Board proposes radically simplifying the rules and clarifying governance. The reformed Pact would target a sustainable debt level, to be achieved by controlling net expenditure growth in a way that allows stabilising the economic cycle. An escape clause would allow room for inevitable discretion, but based on independent judgement. Additional possible reforms include a targeted Golden Rule to protect growth-enhancing public expenditure, making compliance with rules a precondition for access to a central fiscal capacity, reconsidering reverse qualified majority voting, and appointing a full-time President of the Eurogroup who is not a national finance minister.