To contain the health and economic damages in the wake of the COVID-19 crisis, European Union (EU) member states not only let automatic stabilizers do their work, they also actively intervened on an unprecedented scale. This was possible since the EU made use of the general escape clause of the Stability and Growth Pact. As a result, the ratio of debt over GDP rose to almost 100 on average in the EU – compared to almost 120 in the U.S. In addition, with the newly introduced €750-billion temporary recovery instrument, known as NextGenerationEU, the EU now has a joint debt financing facility.
Until recently, such debt over GDP ratios would have been deemed highly perilous. Moreover, in the case of the EU, the average comes with a substantial dispersion across member states – which is crucial. Given these ratios, concerns arose about the mechanism and speed to reign them in. Responding to the changing background conditions, the EU is currently in the midst of a discussion on how to redesign its rules-based system. Given Europe’s variety (including in national fiscal room for maneuver), what should such rules look like? How can they contribute to achieving sustainable public finances? How should they be devised to allow for flexible responses to crises?
This seminar will present the state of debate about Europe’s renewed fiscal architecture, assess the merits of recent reform proposals and their international consequences, and evaluate the consequences on banking and financial markets.