Eurozone crisis is regarded as an unwelcome reminder that fiscal discipline requirement cannot be ignored by any country. It make clarification on issues associated with fiscal rules and the ways of achieving such discipline. As far as fiscal policy is concerned in euro areas, it combines the elements of common currency and federalism. The national fiscal policies is influenced by designing of stability and growth impact. Separation between independent fiscal policies and common currency have been erased by sovereign debt crisis. Debt limit and deficit of stability and growth pact are considered as insufficient to deliver fiscal discipline due to hard legislation endorsed by political system as depicted by numerical rules (Ahmad et al. 2013).
Today, fiscal governance in European Union is regarded as set of common rules at super national level and decisions concerning fiscal policy at national level taken by member states in the legal framework of EU. Member states of European Union have been pushed to adopt intrusive and extensive fiscal rules. Stability and growth pact has been facing consistent paradigm and the integrity and effectiveness of fiscal rules has been at risks due to shortcomings of enforcement and implementation that are politically driven. The thrust of reforms of many economic governance in response to the eruption of economic crisis that erupted after the revealing of dire state of finances of Greek public (Allegret et al. 2016). It is suggested by empirical evidence that European Union has continued to play a powerful role in economic governance of European Union. For the maintenance of fiscal sustainability, domestic fiscal rules have to be introduced by European countries as a part of reform that is consistent with medium term objective. EU leaders have been forced to contend with the weakness of future viability of common currency and structure of Eurozone. In light of this, member states of EU was tensed about necessity of fiscal integration (Baldwin and Giavazzi 2015).
Fiscal rules have always advocated by bodies such as OECD and IMF with transparency being viewed as necessary ingredient along with good economic governance interests. Implementation of fiscal policies is regarded as politically more sensitive because it relates to heart of distributive politics and it concerns the role of state. Democratic legitimation is deemed to be required while the implementation of such policies. Distinct rules justification has the intention of reducing damage of externalities arising from cross border. Rule is regarded and viewed as partial alternative for the re assignment of competencies of fiscal policy to supranational level and coordination of policy to supranational level. Fiscal policy implication was done mainly to deal with any asymmetric shocks as monetary policies dealt only with symmetric shocks (Thimann 2015).
The assurance of fiscal sustainability is convinced by fiscal rules long run evidence. The absence of fiscal stabilization capacity as one of the weakness in area of Eurozone is highlighted by critics of Euro. There have been establishment of various coordination mechanisms for complementing the supranational monetary policy in relation to lacking of federal competence for structural and fiscal policies. Between year 2010 and 2014, the strength of medium fiscal framework have either been maintained or increased by all member states in accordance with the estimate by European commission of “fiscal rule strength index”. However, the verdict on fiscal rules are pretty negative when it is judged purely by EU member states budgetary indicators. This was hardly advantageous to sustainability of budgetary strength. Deficits resulting from crisis have risen in some states while it had come down in some other states (Tuori and Tuori 2014).
Compliance in regard to fiscal rule shave remained disappointing despite of the reforms that have been taken in EU in the fiscal policy governance. Debt target of 60% have been missed by half of members of euro areas while in most years, Portugal and Greece missing the target. Nonetheless, the most cause of concern is politics of compliance rather than economics of compliance. The credibility of stability and growth pact has been undermined by Germany and France resulting from sanction notorious rejections for breach of limits in year 2002 and 2003 (Wyplosz 2013). Enforcement of fiscal rules is considered and regarded as tricky depicted by outcome of enforcement latest episode of fiscal discipline of EU in relation to Spain and Portugal. Excessive deficits in these two states have not been reined as found in Mid-July, 2016 that has the repercussion of fine imposition under the Stability and growth pact rules. Furthermore, lack of adherence of debt rules and deficit had also impacted the fiscal policy implementation. Worst performers are the member states who are subjected to formal programs of macro-economic adjustment such as Spain that had limited program that is targeting banking sectors. Euro areas countries have greatest risk of fiscal sustainability, United Kingdom being exception. Debtors and creditor countries does not have any systematic divider and the most fiscally sound countries as per the indicators include Estonia and Czech Republic. On other hand, Spain and largest member states of EU have vulnerable fiscal position while Poland and Germany being in better position (Vilpišauskas 2013).
Number of fiscal rules:
(Source: Eprints.lse.ac.uk. 2017)
It is indicated by directive of article 2(c) that there are many component to be included in the framework of fiscal policy that comprise of numeric fiscal rules that are country specific and helps in contributing to conduct of fiscal policy by members states in consistent way. EU has experienced a steady rise in number of national fiscal rules and there was an average of four fiscal rules per member state by year 2014 as against only twelve as a whole in year 1990 as depicted by above graph. Member countries are faced with many rules that are aimed at setting limits on expenditures of government and restraining debt amount. There are specific legislation for enacting the rules while most of them have not been written in their constitutions. The way government approaches to the fiscal rules with increased number of EU countries setting up independent fiscal councils has called for greater scrutiny. Legislation of EU sees that such fiscal councils have more independence from government and varied mandates that the case actually is. There should not be confusion between audit bodies that are charged with verifying public spending probity and fiscal councils. However, existing audit body might perform the functions of fiscal councils. Some member states such as Slovenia and Czech Republic hardly qualify as fiscal rules due to rules being prone to provisions and short term nature of restrictions. Two countries that is Poland and Czech republic does not have any fiscal council and sine they are not the signatories of “two pack”, they are not bound to introduce the same (Eichengreen et al. 2013). The fiscal council of Slovenia has been hindered resulting from political problems, although they are subject to two pack obligation. Fiscal council deficits is considered to be more of problem in some countries such as Slovakia, Austria and Spain as identified by government and there is lack of medium term objective attention. Moreover, there is a significant deviation of structural adjustment ratio and medium term objectives. Some member states have fiscal positions on public debt that are more favorable than new rule of Lithuania and Bulgaria. Breach of fiscal framework of Sweden is indicated by verdict of finanspolitiskaradet about commitment funds absence and the fiscal balance. Expenditure rule implementation indicating lack of uncertainty and application of rule in Spain and Ireland has several instances of disagreement (Nölke 2016).
It is complained by several fiscal councils about overly compressed timetables for key valuations of countries such as Ireland, Spain and Sweden and incomplete necessary data provisions. The projections of budget is based on unchanged polices assumption and unplanned spending level that has hampered the working of Ufficio Parlamentare di Balancio (Auel and Höing 2015). EU fiscal rules examination depicts some convincing evidence of the restraining effect on the extent that leads to deviation of fiscal position from target as allowed by government. Evaluation of success of any individual fiscal rules is difficult due to overlapping of such rules. Great deviation between counter cyclicality and fiscal rules has been ascertained by many authors. Ambiguity and doubt exists in terms of resonance of rules of EU same as national rules. Stability and growth pact of EU cannot be a substitute of fiscal policies, however they can be merely an envelope of fiscal rules. One of essential part of fiscal discipline is broad consensus among home grown states driven by their rules and a weak enforcement of rules is condemned at EU level (Thimann 2015). Rules focusing on fiscal policies and structural reforms have been zealously pushed by European commission. The crisis of Eurozone is considered as challenging test of capability of EU for controlling intergovernmental constitution. Decision making bay center has shifted towards the relation between ECOFIN council and European council with euro crisis and with its deepening has led to the formation of Fiscal compact treaty that do not recognize European parliament as policy making actor. The possibilities of political discretion regarding fiscal policies implementation is limited by balanced budgeted rule introduced at constitutional level (Majone 2014). The voluntary coordination of fiscal policies between member states by lack of reciprocal trust.
The architecture of economic governance has been undergoing some vital changes due to latest economic and financial crisis. Many important reforms have been passed by EU to prevent debt crisis and this steers to fiscal and national policies. Implementation of stronger fiscal measures has been refrained by European commission. In contrary to this, extension of six deadlines for making fiscal adjustments have been proposed by European Union. This particular fact depicts member states being hesitant in using discretion for emphasizing on recommendation of reforms. One of key governance innovations of the last few years, is strengthening of macro-economic imbalances surveillance other than in the domain of fiscal policy (Cesaratto 2013). Fiscal discipline of EU and the constraints relating to it is perhaps inconsequential with regard to government decision making capacity at substantial level.
Ability of parliament to control and scrutinize economic policy has been affected by new structure of Eurozone economic governance. The primacy of national policy in fiscal affairs is intact due to adoption of reforms since crisis. There have been more constraints in the fiscal policies of government and balance of fiscal two level game to supranational level has been titled by semester. Supranational recommendations and targets have conditioned economic policies of government and have constrained their ability to respond to their national parliament wishes. An active response has been provoked amongst national parliament by European reins reinforcement on fiscal policies (De Grauwe 2016).
The wake of eurozone crisis has resulted in adding layer of public debts in many of European member countries and for several decades there have been lack of fiscal policy discipline. Deficit bias have been arose due to power of interest groups in creating externalities. Many countries have adopted rules relating to fiscal policy and the established rule are not sufficient for the implementation of fiscal policies. From the analysis and discussion of aftermath of eurozone crisis in relation fiscal policy, unanswered question is whether restraining effect of fiscal policy is lasting. Some of solutions of the shortcomings of fiscal policy is paying careful attention to government incentives and judicious designs. Furthermore, attention is also required to be given on acceptability by public and their reinforcement and other political rules relating to economic dimensions. The enforcement and adherence to commonly agreed fiscal rules have remained “imperfect at its best”. In the current scenario, it can be said that member states of EU is facing dilemma and sustainable macroeconomic stability cannot be assured by other rules than fiscal rules.
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