Lessons From the COVID-19 Crisis for Euro Area Fiscal Rules
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DOI: 10.1007/s10272-020-0916-y
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Daniel Gros
Lessons From the COVID-19 Crisis for Euro Area Fiscal Rules The main thrust of the existing rules, although they were not really enforced, did go in the right direction, namely they were intended to reduce deficits and debts. The © The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics.
Daniel Gros, Centre for European Policy Studies, Brussels, Belgium.
ZBW – Leibniz Information Centre for Economics
countries that stick to these principles went into the coronavirus crisis with lower debt and more fiscal space. Germany’s fixation with the schwarze Null, or black zero, must now appear in a different light. It was always meant to be an appropriate stance for an economy close to full employment. By sticking to it during good times, the German government has been in a very strong position to react forcefully to this unprecedented crisis. The real issue now is not whether the old rules should be reinstated immediately. Nobody argues that in 2021 the government should keep deficits below 3% of GDP. But some principles are still needed – unless one assumes
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that debt is free. Few would argue that governments can spend as much as they want. Even proponents of a permanent stimulus seem to recognise that fiscal space has its limits. Looking at the US for example, Krugman (2020) argues for a permanent stimulus in the form of a permanent increase in investment spending, broadly defined, of 2% of GDP without increasing taxes. He acknowledges that this would push the US debt-to-GDP ratio towards 200%, which he considers sustainable at today’s low interest rates. Even this proposition contains some implicit consideration about sustainable debt levels. Why would a debt ratio of 300% be unacceptable? Why not go for deficit-financed investment spending of 3%-5% of GDP? Some guidelines for fiscal policy are thus unavoidable. The key issue is what general considerations should guide fiscal policy in these uncertain times. I propose two: • Large shocks might be more prevalent than we thought before the crisis. This would reinforce the case for ‘keeping some powder dry’, i.e. limiting the increase in debt during the crisis, and reducing debt levels when normality is restored.
the euro area in the space of one decade. One certainty of this crisis is that nobody can know for sure about the distribution of large shocks and how likely it is that another shock materialises any time soon. But, as Kozlowski et al. (2020) argue, having experienced two pandemics in the space of 140 years must lead one to re-evaluate the likelihood of another one occurring during the next generation. This does not mean that fiscal policy today should prepare for the next pandemic. The next major shock is likely to be quite different. But this heightened uncertainty suggests th
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