Polish economists postulate abolition of fiscal rules in EU

Abolition of EU fiscal rules: deficit reduction to 3 percent of GDP and public debt up to 60 percent of GDP – the economists of the Polish Economic Institute (PIE) and the Ministry of Finance postulate in a publication on EUROPP – the London School of Economics blog.

As assessed in the text by the authors: Piotr Arak and Jakub Sawulski from PIE and the chief economist of the Ministry of Finance Łukasz Czernicki, these fiscal rules cannot be considered sustainable.

First of all, they argue that almost every Member State violates them, and the pandemic has made these violations even worse. Italy's debt approached 160 percent of GDP, and France and Spain is at the level of 120 percent. There is no chance that these debt levels will come close to the EU's 60 percent limit without taking significant savings. And, as they indicate, the imposed austerity policy can have a large negative impact on growth.

As the authors recall, the ECB has had a negative deposit rate since 2014, the pandemic "blew away" all other precautionary measures, and on the fiscal side, also strict EU budget rules have been suspended.

The fiscal policy pursued in the EU over the past decade has been wrong, according to the authors, such a conclusion can be read either directly or between the lines of statements by European policymakers during the current crisis.

Therefore, Arak, Czernicki, and Sawulski believe that since the fiscal policy of the past was wrong, the principles on which it was based should be abandoned. In support of this thesis, they indicate, for example, the work of scientists from the Inter-American Development Bank, who argue that rigid fiscal rules are detrimental to public investment. These studies show that in countries with rigid rules, fiscal consolidation at the level of at least 2 percent of GDP is associated with an average decline in public investment of 10 percent. According to the authors, these results are in line with what has been observed in the euro area in the last decade.

(PAP)