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Greater fiscal coordination for the euro area

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:

* KEY TERMS

Fiscal stance: the direction given to fiscal policy by government decisions on tax and expenditure.

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

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