Reflections on the Stability and Growth Pact's Preventive Arm in Light of the COVID-19 Crisis

摘要

Over the last decade and in light of the past great financial crisis, the EU's fiscal framework has been modified in many respects. One major modification with material consequences for the euro area's aggregate fiscal stance pertains to the introduction in 2015 of a so-called matrix of fiscal adjustment requirements under the preventive arm of the Stability and Growth Pact (SGP). For countries that have not achieved their medium-term budgetary objectives, these fiscal adjustment requirements need to feed into their budgetary planning for the next year. Importantly, the matrix has also become the guiding post for adjustment requirements in countries with high government debt ratios, de facto replacing the application of the SGP's debt rule, which had been introduced with the six-pack and two-pack regulations in 2011. By the end of 2019, all euro area member states were subject to the SGP's preventive arm. As the devastating COVID-19 shock hit Europe, however, they were allowed to deviate from the fiscal adjustment requirements that would normally apply thereunder, and for the first time since it was introduced in 2011, the SGP's general escape clause was activated. Although deployed independently, this has allowed fiscal and monetary policy to counteract the economic impact of the pandemic in a mutually reinforcing manner. Once the economies have sufficiently recovered, the important fiscal support provided during the crisis will need to be withdrawn and government debt must be reduced.