IMF calls for shake-up of EU borrowing powers and debt rules
The EU needs a new fund to help manage the downturn in its member states and pay for green investments, the International Monetary Fund said, as it called for an urgent overhaul of the bloc’s handling of public finances amid mounting economic risks.
The IMF warned that the union’s current economic framework had “failed” in its fundamental task of containing fiscal risks, and said in a policy proposal that the EU should create a new “fiscal capacity” financed through the issuance of common debt and new revenue streams. about the experience of the temporary Covid-19 recovery fund of 800 billion euros.
This would come on top of a review of EU fiscal rules to ensure sounder public finances and more flexibility to deal with economic crises, the IMF suggested.
“Reform of the EU fiscal framework cannot wait,” the IMF said in a paper published on Monday. “Multiple unprecedented shocks on top of already high debt levels are making fiscal policy more difficult. Interest rates have risen and monetary policy normalization continues steadily.”
With the EU moving towards a potential recession due to the energy crisis, and interest rates rising against a backdrop of high debt levels, fiscal policy reform is quickly on the EU agenda.
The looming shock to household income is likely to spark calls for new EU common loans to dampen economies – on top of the existing recovery fund. One of the ideas would be joint schemes to protect households from rising energy prices, or new community loans to support energy investment projects.
Northern EU Member States, however, supported the NextGenerationEU Recovery Fund against the background of the slump caused by the pandemic, as it was a one-off, and they have shown little incentive to create a permanent new EU fiscal capacity. Attempts by some southern politicians to start a debate about extra loans at the beginning of this year failed.
Nevertheless, the IMF said the EU now needed to implement a “well-designed EU fiscal capacity” to help stabilize economies, especially when central banks had limited monetary policy firepower, and to make important investments to combat climate change and to increase energy security.
This would be accompanied by a revision of the EU’s Stability and Growth Pact, which requires member states to respect a deficit ceiling of 3% of GDP and a debt ceiling of 60% of that figure.
The European Commission is preparing a series of proposals to revise the pact to make it clearer, more enforceable and more responsive to the high public debt stemming from the Covid-19 outbreak.
Enforcement of the rules is currently on hold until the end of next year in the wake of the pandemic. The committee is expected to table reform proposals next month, which may require new EU legislation.
The IMF report found that the pact in its current form had failed in its “most fundamental purpose” – to reliably mitigate fiscal risk. It did not suggest scrapping the 3 percent or 60 percent limits, but argued that the speed at which member states should improve their fiscal positions should depend on an analysis of their debt sustainability.
All EU countries should adopt medium-term budgetary frameworks and set multi-annual annual expenditure ceilings, with independent national fiscal councils playing a stronger oversight role.
“The European Union needs revised fiscal rules that provide the flexibility for bold and swift policies when needed, but without jeopardizing the sustainability of public finances,” the IMF said. “It is crucial to avoid debt crises that could have major destabilizing effects and put the EU itself at risk. In normal times, larger fiscal buffers will have to be built up for this.”