2022 annual report of the European Fiscal Board

On 26 October, the European Fiscal Board (EFB) published its sixth annual report. The report assesses the fiscal policy conducted during the recovery of the economy after the Covid-19 pandemic and updates the EFB’s proposals for a reform of the EU fiscal framework.

The EU economy experienced a strong rebound after the Covid-19 crisis. Real GDP grew by more than 5% and the general government deficit improved by around two percentage points in both the EU and the euro area. However, while the need for crisis measures was expected to recede in 2021, some Member States decided to further increase government expenditure with a sizeable permanent component well above the pace sustainable in the medium to long run. As a result, headline deficits decreased less than the economic recovery would have implied, and the structural primary budget balance continued to deteriorate.

In this context, EU fiscal guidance to Member States was uniform across all EU countries, purely qualitative and focused on the immediate response to the crisis. Professor Niels Thygesen, Chair of the Board, noted that “in hindsight, the 2021 surveillance cycle - with its many deviations from rules and established practice - underscores the need to clarify as soon as possible when and how to return to a rules-based approach. This relates foremost to the use of the severe economic downturn clause, which was extended until the end of 2023 without a sufficient economic case being made”.

The EFB pleads for a comprehensive reform of the economic governance: not only updating the fiscal rules, but also complementing them with joint efforts. In order to focus on gross policy errors, the EFB proposes further differentiation in the implementation of fiscal surveillance. At the same time, more reliance on national monitoring of fiscal performance could be envisaged for a sizeable majority of Member States, provided the EU institutions validate a transparent and solid national fiscal framework. The EFB reiterates the need to create a central fiscal capacity for stabilisation focused on improving the capacity of all Member States to mitigate large-scale temporary shocks. It also advocates joint efforts to assure the supply of high-priority EU public goods through a larger budget, increase by national envelopes in a net neutral way.