Fiscal rules and the macroeconomic constraint

The need to revise the eurozone fiscal rules now seems widely accepted and many amendments are being discussed. They are still meant to impose discipline on governments’ financial behaviour but are trying to define smarter ways to constrain public deficits or spending. The purpose of this policy insight is neither to dispute the need for fiscal discipline nor to formulate a new proposal to enforce it. It is rather to draw attention to an often-overlooked issue that has come to the forefront during the last decade: when monetary policy has lost most of its leverage on private demand, trying to meet a fiscal target that does not take into account the spending behaviour of private agents can unduly constrain economic activity. The argument rests on a simple logic: if the private sector tends to accumulate more financial assets than it issues liabilities, the government has to provide the debt liabilities that will allow economic activity to remain close to its potential. A look at the data shows that when households set money aside, they mainly acquire – directly or indirectly – debt claims while, contrary to what is often expected, firms are hardly net issuers of debt liabilities. Public indebtedness hence plays a key role in providing the counterpart to the financial assets households tend to accumulate. In one way or another, our revised fiscal rules should also take into account the reality of this macroeconomic constraint.