Greater fiscal coordination for the euro area

 

SUMMARY OF:

Communication (COM(2016) 727 final) — Towards a positive fiscal stance for the euro area

WHAT IS THE AIM OF THE COMMUNICATION?

It makes the case for a significantly more positive fiscal stance* for the euro area in order to support the ongoing economic recovery and to avoid the ‘low growth, low inflation’ trap.

KEY POINTS

• The communication notes that the current situation is suboptimal because of the following.
  • The Commission forecast (autumn 2016) and the draft budgetary plans (submitted November 2016) expected little change in fiscal stance for 2017 and 2018 for the euro area as a whole, while the economic situation in autumn 2016 appeared to call for more expansion.
  • Fiscal distribution across euro-area countries is very uneven. Those which do not have fiscal space (i.e. the extent to which governments can be flexible in their spending choices) want to use it; those which have it, do not want to use it. A more collective approach is needed.
• The communication draws various conclusions:
  • responsible growth-friendly fiscal policies can help structural reforms to boost employment, productivity and domestic demand;
  • given current circumstances, the impact of fiscal policy measures would be greater than they would be if interest rates were higher;
  • the euro area should be considered as a single entity with one finance minister;
  • a fiscal expansion of up to 0.5% of gross domestic product of the euro area is desirable to reduce unused productive capacity, support monetary policy and avoid unsustainable rates of economic growth;
  • a positive fiscal stance for the euro area faces economic and legal constraints from the need to ensure sustainable public finances and to respect the EU’s fiscal surveillance rules; therefore, this calls for a differentiated fiscal stance across EU countries depending on whether there is the necessary fiscal space;
  • reaching the right policy mix for the euro area is hampered by the absence of a centralised budget, which could play a more positive role;
  • public expenditure , focused on public investment, is key to improving the fiscal stance;
  • improvements in national fiscal systems, along with pension and healthcare reforms, can foster growth-friendly public spending.
• The European Commission intends to:
  • emphasise the overall direction of the euro-area fiscal stance for 2017-2018 in discussions with EU governments;
  • continue to apply the criteria of the Stability and Growth Pact;
  • urge euro-area countries to better reflect the area’s challenges and priorities in their national policies;
  • use all EU means, such as the investment plan for Europe, to maximise the impact of public spending;
  • regularly reassess the economic situation and intervene if necessary.

BACKGROUND

Together with monetary policy, fiscal policy plays a key role in stabilising the macroeconomic environment. It also serves broader goals in terms of fiscal sustainability and redistributing wealth.

For more information, see:

• ‘Start of the 2017 European Semester: Autumn Package’ — factsheet (European Commission).

* KEY TERMS

MAIN DOCUMENT

Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions — Towards a positive fiscal stance for the euro area (COM(2016) 727 final, 16.11.2016)

last update 06.04.2017