EU Votes on Promising Sustainability Plan

Last week, the heads of the EU governments agreed on groundbreaking steps to prevent Greece-style fiscal meltdowns from ever happening again and to put their countries on more fiscally sustainable paths for the medium and long run.

The new measures would tighten up the currently weak preventative and corrective sanctions for countries that deviate from the EU’s longstanding official annual fiscal path target (a budget deficit of 3% of GDP) and the medium-term debt goal (60% debt-to-GDP). Under the new rules, EU governments would face an escalating series of tougher sanctions for breaching these targets. Ultimately, a country would be subject to a fine.

While many of the changes to be made are EU-specific, the US can learn from the EU’s increased emphasis on a medium-tern fiscal framework rather than our usual piecemeal approach annually (we don’t even have a budget this year and the fiscal year has already started); the importance given to medium and long run sustainability; and the strengthening of budget statistics so that policymakers and taxpayers have a full and transparent picture of their country’s fiscal exposure, Countries are finally beginning to realize the urgency and importance of long-term fiscal sustainability and how annual decisions fit into their forward planning.

While last week’s agreement was a major success for the EU, the EU legislative process is not over. The recommendations (based on the Report of the Task Force on Economic Governance plus proposals by the European Commission) will now be put on a fast track so that the EU heads of government and the European Parliament come to an agreement on numerous implementing provisions by next summer. Also, stay tuned for December, when pension reform is scheduled to be on the leaders’ agenda.

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