Vox
December 16, 2011
As Eurozone leaders move towards fiscal integration, critics say the focus on fiscal rules will condemn countries to austerity and deep recession. This column argues that the latest proposals are not nearly so fearsome.
As Eurozone leaders move towards fiscal integration, critics say the focus on fiscal rules will entrench pro-cyclical fiscal austerity. This criticism, a knee-jerk reaction to the fact that Germany advocates both new fiscal rules and immediate austerity in peripheral countries, is misguided on a number of levels.
First, we all know it would be nice to boost government spending across the board to fuel growth today; but we did that already in 2009. Now some countries find themselves with public finances so shaky that they have no alternative but to tighten fiscal policy; and as growth is already slowing, this is indeed pro-cyclical. But this has nothing to do with fiscal rules; it is the consequence of current market pressure and past government profligacy.
The fiscal rules agreed at the 8-9 December EU summit are defined on “structural” fiscal balances. The structural fiscal balance is meant to correct exactly for the impact of the economic cycle. It is obtained by calculating where government revenues and expenditures would be if output were at potential level, to get a better gauge of the fiscal stance. When output is below potential, the economy is weak, revenues tend to be lower while some social expenditures (such as unemployment benefits) tend to be higher; the corresponding widening in the deficit just reflects the natural impact of a weaker economy, which the so-called automatic stabilisers mobilise to support. Conversely, when output is above potential, higher tax revenues reflect a stronger economy, not a more rapacious government.
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