FINANCIAL WORLD | WORKING PAPERS
The Prudence Principle – A New Framework for Eurozone Fiscal Policy
by Marc Blyth & Eric Lonergan
PUBLISHED13. DECEMBER 2021
This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.