New Rules to Secure Fiscal Sustainability in the European Monetary Union

Abstract

In this article, after a brief introduction to the evolution and enforcement problems of the fiscal rules set up so far to achieve stability and growth of the Euro area, new fiscal rules are proposed to avoid the successive breaches of the current ones. We argue that the adoption of clear and detailed new rules would be more efficient than mere standards. These new fiscal rules are complemented by a reference to what the functions of the European Central Bank should be, returning to its original purpose. Finally, we suggest an organisational structure and the role that independent fiscal authorities should play to guarantee compliance with the new rules.

Keywords: fiscal policies, rules vs standards, deficit, public debt, fiscal authorities

1. The problem

When the first steps were taken in the design of the New Rules to Secure Fiscal Sustainability in the European Monetary Union (EMU), there was debate around the convergence criteria required of the countries that wanted to be part of the union. While the monetary criteria – referring to inflation rates, interest rates, and exchange rates – were not the subject of much discussion, since their relevance to a unified currency area was clear, the same was not true of the fiscal criteria, which required public deficits to be lower than 3 per cent of GDP and a level of public debt not exceeding 60 per cent of GDP. The question as it was put at the time was: is it necessary to control these variables in a monetary union, when its rules expressly prevent financing public spending through borrowing from the central bank? Some economists pointed out that such fiscal rules were not necessary, since fiscal policy was the responsibility of the member states and they could not influence the balance sheets of the European Central Bank (ECB) and, therefore, the creation of money supply (Vaubel et al., 1989). A sustained budget deficit or a very high public debt to GDP ratio in a member state of the monetary union would be equivalent to the financial imbalances of a region or province in a member state with its own central bank. These imbalances could have important effects on the real economy but not on price stability, the main objective of the ECB, according to the Treaty on the European Union.

This idea was rejected, however, on the grounds that the existence of serious fiscal imbalances in a member state could cause problems for the monetary union because they would threaten the stability of the single currency. As the Greek financial crisis later showed, the systematic breach of the principles of fiscal stability by a member state – even by one whose GDP represented only a small percentage of the GDP of the Eurozone – could well create serious problems for the whole monetary area. If default and partial cancellation of the debt are not considered an acceptable solution for a member state of the monetary union, it is then necessary to impose rules to avoid unwise fiscal policies.

The initial fiscal stability rules were consolidated in the Stability and Growth Pact (SGP). These were later modified on several occasions, with regard to both its ‘preventive arm’ and its ‘corrective arm’. The first reform was made in 2005, while changes were also introduced in 2011 and 2013. These reforms were intended to deal with the specific problems that the application of the SGP posed to some member states, especially in the aftermath of the 2007–2008 Global Financial Crisis. The most important changes were the following: emphasis was placed on country-specific medium-term objectives and procedures to set and revise them; furthermore, it was considered convenient to take into consideration the possible existence of ‘severe economic downturns’ and the role of other relevant factors to establish what comprises an ‘excessive deficit’. A complex expenditure benchmark was introduced as an indicator to assess compliance with the adjustment paths towards the medium-term objectives; a ‘significant deviations procedure’ and a ‘corrective mechanism’ with possible sanctions were created; and members states were required to submit to the Commission and to the Council their budgetary plans in the autumn of each year, ahead of the discussion of the budget in their own national parliaments. These reforms, aimed at better controlling each member state’s public finances with fiscal imbalances, had, however, the negative effect of creating an excessively complex system, which in practice makes it very difficult to carry out such control. The main variables to monitor are not clearly defined, and their assessment is subject to so many possible interpretations that the application of the preventive and corrective arms of the SGP becomes virtually non-operational, inefficient, and even non-credible. For example, the new fiscal regulations that were approved also contemplated the possibility of establishing sanctions for fiscally errant member states, but this was never implemented.

Despite all these problems, the fiscal rules established in the EMU have had positive effects insofar as they have created incentives for the governments of some member states – especially in Southern Europe – to improve their public finances since the end of the so-called euro crisis (2010–2013). Although some economists and politicians thought that the introduction of fiscal reforms would be very difficult to implement when the European Monetary Union was launched (for example in Italy, Greece, or Spain), the data show that they could be carried out. It can be argued that the Union’s policy has been excessively tolerant of non-fiscal compliance by member states. But even so, the mere existence of rules draws public attention to the fiscal policies of those governments more prone to fiscal imbalances, and the awareness that the fiscal goals were not being achieved eventually contributed to the correction of too lax fiscal policies.[1] This does not mean, of course, that the mere existence of rules guarantees that fiscal discipline will be met. For example, the way in which some countries interpreted the fiscal deficit rule under the SGP is especially striking, even before its modifications in later years. It seems that some governments have considered that the 3 per cent deficit limit was the rule to follow both in years of low GDP growth and in years of expansion. And this was obviously not the objective of the rule. In a model designed to achieve a balanced budget in the medium term, or along the business cycle, a 3 per cent fiscal deficit is acceptable in years of low economic growth as it can be compensated with budget surpluses in the expansionary years, therefore resulting in balanced budgets over the cycle. But some countries, with no real desire to reduce their structural deficits, used their compliance – or near compliance – with the 3 per cent rule as an excuse to accumulate excessive deficits for a long time, and hence cumulative growth in public debt over the long term. The COVID-19 pandemic significantly worsened the already existing fiscal imbalances in some EMU member states. But the problem existed before, as shown by the budget deficit data of some member states even when they were benefiting from reasonable economic growth rates in the years prior to 2020.

Data from pre-pandemic years show substantial differences between fiscal policies and performance across EMU member states. Tables 1 and 2 show data of net lending or borrowing and of GDP rates of growth in the five biggest economies of the EMU in 2017, 2018, and 2019. While countries such as Germany and the Netherlands closed their budgets with sustained surpluses between 2017 and 2019, France, Spain, and Italy ran high deficits.

The comparison between budget deficits and GDP growth rates in these countries is interesting for the study of fiscal stability rules because it shows that the deficits of France, Spain, and Italy cannot be explained as a result of experiencing low economic growth rates. Conversely, Spain was the country with the higher rate of growth in this group and France had a higher rate of GDP growth than Germany in these years. Despite this, France and Spain were both unable to balance their budgets and ran fiscal deficits in the range of -2.3 per cent, -3.1 per cent of GDP. This result has implications when thinking about the reform of budget stability rules because data show that these imbalances were not created by ‘severe economic downturns’ and thus were not motivated by the action of the so-called fiscal automatic stabilisers, which result in higher government spending and lower tax receipts when the economy is contracting. This deficit drift in some of the member states’ fiscal policies would inevitably produce ever-increasing public debt levels.

2. Rules versus standards

Since the return to the fiscal stability rules was proposed after being put on hold due to the COVID-19 pandemic, numerous reports and articles have been published on how the new fiscal stability framework should be designed (see, for example, Blanchard, Leandro, & Zettelmeyer, 2021; Darvas, Martin, & Ragot, 2018; Delivorias, 2021; Ilzetzki, 2021; Leiner-Killinger & Nertlich, 2019). Opinions on the direction to take are very different regarding both the role of the European Union and the EMU in designing stabilisation policies and the type of rules that should be imposed on member states to ensure a more sound fiscal position in the Eurozone.

The debate on the best norms for a specific regulation has a long tradition in law and economics. It focuses on the choice of either norms that determine ex ante the expected behaviour in a detailed way (that is, rules) or norms that formulate general principles of behaviour to achieve a certain objective ex post, without going into much detail about how to achieve it (that is, standards). Article 126 of the European Union Treaty, which establishes that ‘Member States shall avoid excessive government deficits’, is a good example of a standard with which member countries must comply. At the same time, the norms which set a limit of 3 per cent for the budget deficit and a limit of 60 per cent for the public debt to GDP ratio are examples of rules with a much more precise content and detailed formulation.

It is not surprising that in the current debate on fiscal sustainability in the European Monetary Union the issue of rules versus standards has emerged again. For instance, Blanchard, Leandro, and Zettelmeyer (2021) support the idea that designing the new fiscal sustainability regulation as a set of rules makes no sense because of the existence of a number of uncertain economic and political factors. Given such conditions, ‘rules are bound to lead to mistakes, constraining fiscal policy either too much or too little’. This is why they suggest the adoption of a guideline that would explain, for instance, that deficits are excessive when debt does not appear to be sustainable with high probability.

Such an argument, however, seems to us flawed and, more importantly, of little use when designing an efficient system of regulations to preserve fiscal sustainability. In his well-known article Kaplow (1992) accepts the idea that the construction of ex ante rules requires effort, whether in analysing the problem, resolving value conflicts, or acquiring the relevant empirical knowledge. For this reason, it is necessary to carry out a cost–benefit analysis, taking into consideration whether the costs of adopting a detailed rule are offset by the significant cost savings of lower costs of application. In cases in which it is to be expected that enforcement problems will not be frequent, then we can say that the lower costs of applying the rules will not compensate for the greater difficulties encountered in their design. But if problems are expected to be frequent, the use of standards can be much less efficient, since the lower design costs will not compensate for the conflicts that will arise in their application. But should we expect frequent conflicts in the application of fiscal sustainability rules? According to the experience available, it is reasonable to say that the answer to this question has to be yes. The history of the European Monetary Union shows that non-compliance with the rules has happened many times; furthermore, we have good reason to think that, if clear and precise rules are not established, non-compliance will also be very frequent in the future.

A public choice argument can also be used in favour of rules over standards. Given that politicians are short-term maximisers of their utility functions, and that their main objective, when in government, is to remain in power, they can reasonably think that the application of the norms aimed at avoiding non-compliance regarding fiscal sustainability could eventually lead to poorer electoral performance in later elections. Therefore, they will have clear incentives to try not to apply them. And such a strategy will be easier and more successful when dealing with fiscal standards, which they can interpret at their own convenience, as compared with more precise rules, which are more difficult to interpret vaguely.

3. A proposal of new fiscal rules: a public spending rule

The next task is to determine what type of rules should be applied in the light of the impact of the COVID-19 crisis on public finances in order to achieve fiscal sustainability, as well as how to encourage compliance with the rules. It may be useful to review the evolution of the two main fiscal criteria set up in the SGP in the period between the two main economic crises of the twenty-first century: the Global Financial Crisis that began in 2007–2008 and the COVID-19 crisis from 2020. Despite a relatively good performance in the first years of the launch of the euro, these crises revealed some of its weaknesses and the asymmetries in fiscal performance across member countries. The 2007–2008 crisis and the macroeconomic policies that were applied to try to reduce the macroeconomic imbalances that it created produced a recessive cycle in the Eurozone, and the GDP of the Euro area fell in 2012 and 2013. But, from 2014 to 2020, the GDP of the Euro area grew steadily with average rates of around 2 per cent, as shown in Table 3. It is interesting to see how the two main fiscal variables discussed in this article evolved in this period. The figures are presented in Table 4.

The budget deficit was reduced from -2.5 per cent in 2014 to -0.6 per cent in 2019. Yet we should note that the sum of the budget balances of Euro area members was a negative figure for every year in this period. Two further points should be noted: firstly, given the recurrence of GDP growth rates in this period, the Euro area was in a position to achieve a balanced budget in the medium term or along the cycle, or even a slight budget surplus. Secondly, as we have seen previously, the behaviour of the different countries in terms of their fiscal performance was very diverse. While some applied sound fiscal policies and contained their deficit, others did not. Moreover, it is precisely in the latter countries where it is more important to establish new rules to secure fiscal sustainability. Regarding public debt ratios, the data show a sustained reduction from 92.7 per cent of GDP in 2014 to 83.6 per cent of GDP in 2019; that is a reduction of 9.1 percentage points, which must be attributed more to GDP growth than to fiscal policies aimed at reducing imbalances.

Multiple formulas can be used to achieve fiscal stability goals. The two criteria used by the European Monetary Union from its origins – limits on the annual budget deficit and limits on the ratio of public debt to GDP – are related to each other since the public debt to GDP ratio is a stock variable that will be reduced over time depending on the size of the deficit in each country. The Maastricht Treaty and the SGP opted for a combination of both fiscal criteria. But given the experience of these years, it seems more relevant to put the emphasis on controlling budget deficits. Public debt is a stock generated by the long-term accumulation of budget deficits, and it is not easy to control in the short term. Alternatively, it is more effective to focus on controlling the budget deficit every year. As noted above, some countries considered that the limit of 3 per cent was a maximum for budget deficits, even when experiencing sound rates of GDP growth. New fiscal stability rules should prevent this from happening. Two steps in this direction can be adopted. The first is to design a fiscal rule that requires governments to balance their expenses and revenue in a multi-year budget period. This formula seems the most suitable to control the deficit within a certain degree of flexibility because it would require governments to adjust their spending and income to the situation of their economies each year, thus guaranteeing medium-term budgetary stability while at the same time allowing for expansionary public policies in the years with lower – or negative – rates of growth. These deficits should be offset by surplus budgets in the years of higher growth along the business cycle. The rule should also set the maximum level of deficit that a government could reach in a specific year – it could remain at 3 per cent of GDP – with the sole exception of years of a severe recession (which would be specified in terms of a fall in the GDP), in which the European Union could authorise higher deficits if such policies were supported by independent national and European fiscal authorities. The problem with using multi-year budget balances as a rule would be that it might be more difficult to control governments’ policies until the budget cycle is over. For this reason, the rule should be complemented with an additional requirement, such as for balanced budgets – or even surplus budgets – in years of substantial rates of GDP growth, such as 2 per cent or higher. This rule would prevent a country with such a growth rate from having a budget deficit in that year.

At the same time, if the public debt limit rule were kept, it would not make sense to establish a specific debt ratio for all countries, be it 60 per cent of GDP or any other. The data presented in Table 5 show that the public debt of the Euro area represented, at the end of 2020, 97.3 per cent of its GDP, with large differences between countries. Below the limit of 60 per cent of GDP we have countries such as Ireland, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, and Slovakia; between 60 and 70 per cent we have Germany and Finland; and above 100 per cent we have Belgium, Spain, France, Italy, Cyprus, Portugal, and Greece (the latter with a public debt ratio greater than 200 per cent of its GDP).

Trying to set a common ceiling for all these countries would make little sense today, in the post-COVID-19 economy, when public debt performance among member states is so asymmetric. It would be better to establish criteria for a gradual reduction of these ratios for each member state to be applied each year, except in the case of deep recession that simultaneously generated high budget deficits and growth in the debt to GDP ratio due to the reduction of the GDP. Higher rates of reduction of the public debt to GDP ratio should be applied to countries with a higher ratio, that is, over 90 or 100 per cent. And countries in which this rate was below a certain level – 60 per cent or a similar ratio – would not be required to reduce their debt.

The possibility of introducing a rule to control the growth of public spending in the member countries is also on the discussion table. Already in 2011, with ‘six-pack’ legislation, an expenditure benchmark rule was established which relates the annual growth of government expenditure, net of discretionary revenue measures, with medium-rate term of potential GDP growth.[2] This rule could be improved by setting a ceiling on government spending growth conditioned by the rate of potential output growth, which would be reviewed by an independent fiscal control institution, as we will see in the next section. A spending rule has some important advantages over a deficit rule. While changes in public revenue are determined, in the short term, mainly by the evolution of GDP, public spending can be determined by governments with a much greater degree of discretion. This means that governments can use it to achieve short-term political goals that, in many cases, may make it difficult to improve fiscal sustainability over the medium and long term. It could be objected that this rule would prevent a government from increasing the public spending to GDP ratio when it desired and its parliament so approved, thus effectively curtailing the fiscal sovereignty of member states. However, this type of rule would apply to countries with fiscal imbalances. Once fiscal balance was restored, voters could again determine what public spending to GDP ratio they wanted in their country.

We should also refer to the role played, especially after 2020, by the European Central Bank. At the end of that year, the ECB accumulated 20.8 per cent of the total stock of government debt of the Euro area as a whole. This policy, articulated by the adoption of a new asset purchase scheme in 2020 (the pandemic emergency purchase programme, or PEPP), accompanied by its expansionary monetary policy, has allowed the countries of the Euro zone to finance their increased expenditures and deficits during the pandemic with almost no restrictions and at an extraordinarily low cost. The positive effect of this policy has been to help finance member states in a very difficult economic situation. Nevertheless, it has also had the negative effect of reducing to a minimum the incentives that a more open financial market would have imposed on governments to limit their indebtedness. If in the future we want to halt the growth of public debt, it would be important for the ECB to focus on its primary function of maintaining price and financial stability and to stop financing the deficits of member countries. Before 2020, it was argued that what the ECB was doing when purchasing government debt was to carry out open market operations to raise an inflation rate that was below its objective of 2 per cent. However, this argument does not make sense now, in 2022, with an inflation rate in the Eurozone above 5 per cent. We should avoid the potential conflict between different goals given to (or adopted by) the ECB, as the main policy actor focused on returning to price and financial stability on the one hand, while on the other hand making it easier for member states to finance their deficits without the discipline imposed by financial markets.

4. Independent fiscal institutions to monitor and enforce the rules

As we have shown, the history of the Stability and Growth Pact in the European Union has been characterised by alternating periods, first of greater demands for compliance with budgetary stability, and second, in the face of persistent non-compliance by the member states with the SGP rules, the adoption of much more flexible norms. Effectively, this led to non-compliance, made possible by the adoption of short-term compliance plans and varied instruments or institutions that gave the appearance of achieving objectives that were spread out over time.[3]

The independent fiscal institutions (IFIs) appear for the first time in Directive 2011/85, establishing that compliance with the quantitative budgetary rules should be monitored by a body independent of the budgetary authorities. Then, with the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union in 2012, the preventive part was reinforced to compel member states to have an automatic correction mechanism in the event of deviations from the medium-term objective. In this way, the IFIs are assigned the role of monitoring this correction mechanism. This gives the IFIs a new role, in addition to ex ante control, and subsequent monitoring of the correction measures, which is much more difficult for national governments to rigorously carry out.

Finally, Regulation 473/2013 goes a step further by attributing to the IFIs greater organisational independence and facilitating access to resources and information to endorse or point out deficiencies in budget forecasts by member states; but at no time does it grant them true autonomy. This would require the IFIs of the different countries to depend on the European Commission, or any other European body that was chosen, and all IFIs would need to have a homogeneous structure with the same set of functions and operational autonomy to allow them to fulfil their objective. That is, in addition to serving as an independent control mechanism for compliance with the budgetary rules of economic convergence in the European Union, they would actively participate in the design and debate of the fiscal policy of each country, both in the preparation of the budgets and in their subsequent execution, and in the decisions on fiscal reforms in each country.

However, the structure, degree of independence, available resources, functions, and other aspects of the organisation of these institutions very much varies across the EU member states, which makes it very difficult to compare them. In most cases their main roles continue to be extremely normative and focused on the supervision of both national and EU fiscal rules; however, it would be desirable to strengthen their contribution to the discussion of the fiscal policy of each country.

In our view, within this reform, the independence of the IFIs should be reaffirmed and their functions extended, which should consist of contributing to the design of fiscal scenarios that allow compliance with clear fiscal rules, especially regarding the deficit. In other words, these institutions should play an active role in preparing the macroeconomic forecasts that serve as the basis for drafting the budget to avoid the recurrence of persistent annual deficits, except in cases of severe crisis. In fact, if we want IFIs to have a meaningful role in preventing further deviations of the deficit in the future, they should even have veto power in cases where the government’s budget draft included significant differences with respect to the macroeconomic forecasts marked by the IFIs.

Furthermore, these organisations should have the power to propose changes to enable their countries to comply with the rule of reducing the gross public debt ratio in the medium term, establishing the conditions to be met by member countries, as well as the timetable for this compliance plan. Moreover, the independent fiscal authorities should also be the real controllers of the government’s fiscal position, so they can comply with the setting of a ceiling on its spending growth, as conditioned by the rate of potential output growth. In order to achieve these new roles, our proposal involves the creation of a new European system of national fiscal institutions that are both organically and functionally independent of their countries’ governments and accountable to the European Commission.

5. Conclusions

The data shown throughout this article demonstrate that the existing fiscal rules have not created an effective system to contribute to fiscal stability in the Euro area. Specifically, the experience of the last two decades illustrates that fiscal imbalances in several member states were not the result of ‘severe economic downturns’ and that these states have actually interpreted the 3 per cent deficit rule as a limit to their budget deficits, regardless of the growth rate of their economies at the time. Similarly, the data indicate that different countries have responded very differently with respect to the commitment to reduce public debt. Indeed, there is a high degree of dispersion as regards fiscal performance among the Eurozone member states.

For these reasons, in this article we present a new proposal for fiscal rules to achieve the desired fiscal stability, after analysing the advantages of establishing specific fiscal rules instead of standards. Thus, we start from the fact that non-compliance with the prevailing rules has happened repeatedly; and we have good reason to think that, if clearer and more precise rules are not established, non-compliance will also be very frequent in the future.

We propose a new budget rule that should have two essential requirements: firstly, it should require governments to balance their expenses and revenues in a multi-year budget period. This formula seems the most suitable because it would force governments to adjust their spending and income to the situation of their economies each year, thus guaranteeing budgetary stability and allowing, at the same time, expansionary public policies during a downside phase in the cycle or even negative growth rates. Secondly, it should establish the obligation to present balanced budgets – or even surplus budgets – in years of high levels of GDP growth, so that a country with a growth rate of 2 per cent or higher could not present a budget deficit in that year. This is to avoid the tendency of governments to defer compliance with the deficit rule until the end of the multi-year budget period, which makes it more difficult to correct for excessive deficits in previous years.

With regard to the public debt rule, it seems more reasonable to implement, instead of a single public debt ratio of below 60 per cent for all, criteria for a gradual reduction of these ratios to be applied each year, except in the case of a severe recession that generated high budget deficits and then a rapid acceleration in the debt to GDP ratio. Similarly, we believe that if we want to contain the growth of public debt in the long term, it is important for the European Central Bank to focus on its primary functions (that is, to maintain price and financial stability) and stop financing the deficits of member countries. Moreover, it is essential to introduce a rule to control the growth of public spending in the member states; this rule could be improved by setting a ceiling on government spending growth conditioned by the rate of potential output growth.

Finally, so that compliance with these new fiscal rules does not become a dead letter, we propose the creation of IFIs under the supervision of the European Commission, with homogeneous functions in all countries. IFIs would play an important role in drawing up the macroeconomic scenarios for the preparation of annual budgets, preventing governments from altering their forecasts of expenses and income as driven by the political cycle. In addition, these institutions should establish and supervise compliance with gradual public debt reduction programmes. Finally, they should be responsible for the observance of the spending ceiling rule of national governments.

References

Bénassy-Quéré, A., Brunnermeier, M., Enderlein, H., Farhi, E., Fratzscher, M., Fuest, C., Gourinchas, P., Martin, P., Pisani-Ferry, J., Rey, H., Schnabel, I., Véron, N., Weder di Mauro, B., & Zettelmeyer, J. (2018). ‘Reconciling Risk-Sharing with Market Discipline: A Constructive Approach to the Euro Area Reform’. CEPR Policy Insight 91.

Blanchard, O., Leandro, A., & Zettelmeyer, J. (2021). ‘Redesigning EU Fiscal Rules: From Rules to Standards’, Economic Policy 36: 195–236.

Calmfors, L., & Wren-Lewis, S. (2011). ‘What Should Fiscal Councils Do?’, Oxford Economic Policy,26(68): 651–695.

Darvas, Z., Martin, P., & Ragot, X. (2018). ‘European Fiscal Rules Require a Major Overhaul’. Bruegel, Policy Contribution Issue 18.

Delivorias, A. (2021). ‘Introduction to the Fiscal Framework of the EU’. European Parliamentary Research Service, February.

Eichengreen B. (1996). ‘A More Perfect Union? The Logic of Economic Integration’. International Finance Section, Princeton University, no. 198, June.

Ilzetzki, E. (2021). ‘Fiscal Rules in the European Monetary Union’. Center for Economic and Policy Research, 10 June.

Independent Authority for Spanish Fiscal Responsibility. (2021). ‘The Independent Fiscal Institutions in the European Union’.Technical Report 1/2021, February.

Kaplow, L. (1992). ‘Rules versus Standards: An Economic Analysis’, Duke Law Journal, 42: 557–629.

Leiner-Killinger, N., & Nertlich, C. (2019). ‘Fiscal Rules in the Euro Area and Lessons from Other Monetary Unions’, ECB Economic Bulletin,3.

Network of Independent Fiscal Institutions. (2021). EU Fiscal and Economics Governance Review.

Vaubel, R., Martino, A., Salin, P., & Cabrillo, F. (1989). ‘A citizen’s charter for European Monetary Union’. The Bruges Group, Occasional Paper 5, December.

[1] An earlier reform of the SGP in the mid-2000s, following infringements by Germany and France, made the rules more countercyclical but was deemed unenforceable because it set targets in the form of the (unobserved) ‘structural fiscal balance’ (Ilzetzki, 2021).

[2] Darvas, Martin, & Ragot (2018) argue that one of the advantages of a rule based on the growth rate of public spending would be that its basic principle is easy to describe: nominal public spending should not grow faster than long-term nominal income, and they should grow at a slower pace in countries with excessive debt levels. Public spending is observable in real time and can be directly controlled by the government. See also Bénassy-Quéré et al. (2018).

[3] Some economists explained this short-term compliance as what they call ‘deficit bias’, impatience in particular. The idea is simple: agents have hyperbolic discount functions rather than conventional exponential discount functions (Laibson, 1997). This makes individuals impatient in the short term, but more patient over medium- to long-term horizons, implying time-inconsistent preferences, and it can work at the level of individuals or governments (Calmfors & Wren-Lewis, 2011).