What could better EU debt rules look like? Short Cut with J. Zettelmeyer and A. Truger

For more than two years now, the EU debt rules have been suspended, which in the eyes of many critics had long been ineffective anyway. We spoke with Jeromin Zettelmeyer and Achim Truger about the latest reform proposals of the EU Commission and the Council of Economic Experts.




7. DECEMBER 2022



The EU’s debt rules have been suspended for two years, and in the opinion of many critics in Germany, the criteria have not been effective for a long time anyway. So what could better rules look like? The EU Commission made a proposal on this at the beginning of November, as did the German Council of Economic Experts. Is the solution that in future the Länder agree on an individual multi-year debt reduction plan with the Commission? What would be the point of giving much more explicit preference to public investments in the future and exempting them from the debt criteria, as the German experts propose?


We discussed this last Friday in our New Economy Short-Cut with the new director of the Brussels think tank Bruegel Jeromin Zettelmeyer and the member of the German Council of Economic Experts Achim Truger on 02 December at 4 pm via Zoom.


The Proposal of the EU Commission

1. EU commission undertakes DSA-based debt risk classification.
2. Countries with high and moderate risk have to hand in a reference adjustment path with a net expenditure ceiling (excluding interest payments and cyclical expenditures) so that after 7 or 4 years (depending on public investments and reforms) they have a primary deficit of less than 3%.
3. Country proposes a medium-term fiscal-structural plan (as a potential alternative to the commission plan).
4. If there is not agreement between commission and the member state, the commission’s plan is to be enforced.

Zettelmeyer started the discussion by presenting his view on the topic. After stressing the difficulty to find a politically feasible improvement, he started by a summary of the status quo ex-ante (until 2021). First, he outlined the criticisms that have been put forward: economic inefficiency of the rules, as they rely on error prone pro-cyclical adjustment, unfriendliness to public investment, and non-compliance by EU member states. Politically, there was a division into a Northern ‘frugal’ block of countries, and a Southern block demanding more flexibility for adjustment.

This division seems to have weakened during the last year – at least to some extent. Zettelmeyer has summarised the common ground in four points:

    1. Ensure debt sustainability in a ‘more effective (rule works) and efficient (lower cost) way’
    2. Other fiscal objectives also matter: stabilisation and public investment (with a potential trade-off)
    3. Even-handedness: bilateral deals between EU commission and states are not acceptable (too much discretion for commission, and advantage for larger states)
    4. Better implementation of fiscal rules, for example by better national ownership of the rules

According to Zetelmeyer, the EU proposal in relying on a debt sustainability analysis (DSA) based debt risk classification fulfils the call for a more efficient rule. But it has drawbacks on the even-handedness side, as it gives a lot of discretion to the commission. However, it is at least much more transparent about it.

“The commission forces itself to be transparent. It is now not a back-room negotiation anymore, but a front room negotiation.”
Jeromin Zettelmeyer

As a possible fix to the problem of excessive discretion and too little national ownership, independent national fiscal institutions could help to develop the reference paths. Additionally, a more detailed specification of the rule could help to reduce discretion and raise even-handedness.

Achim Truger raised the issue of democratic legitimacy that independent fiscal institutions would face and therefore argued that such institutions should only be concerned with analytical tasks and not with political decisions. Moreover, he emphasised the importance of public investments as a special case of government spending, which should not be subject to a fiscal rule. Zettelmeyer argued that the commission takes a nuanced view on the investments issue, as it explicitly includes the trade-off connected to spending: a negative effect on debt, but a positive effect on growth given that it pays for itself in the future.

The whole discussion as Re-Live



The euro was planned during a period in which economic policy making was driven by a deep belief in market liberalism and the near impossibility of systemic financial crises. This belief has been brought into question since the euro crisis, which showed that panics do happen. New thinking needs to focus on developing mechanisms to protect eurozone countries from such panics and to foster economic convergence between members.