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After COVID-19: Rethinking Fiscal Rules in Europe

Following the COVID-19 outbreak in Europe this spring and subsequent measures to contain the pandemic, the European Commission drastically revised its economic and fiscal forecasts. The Summer 2020 Economic Forecast projects that the euro area economy will contract by 8.7% in 2020. The coronavirus crisis is expected to push the general government deficit to about 8.5% of GDP this year. Even in an optimistic V-shaped recovery scenario with a GDP growth rate of 6.1% in 2021 due to the temporary nature of lockdown measures taken in 2020, the headline deficit is expected to decrease to about 3.5% of GDP. Furthermore, both the downturn and the rebound of economic activity are expected to be asymmetric across member states, exposing entrenched divergences. The recent outlook highlights the problem of pro-cyclical revisions of potential output and output gap estimates. Some economists warn that the current fiscal framework may lead to pro-cyclical and thus destabilising fiscal policies, a problem encountered in Southern Europe during the European sovereign debt crisis that has implications for the entire European Union. In order to avoid repeating past mistakes, the debate on how to reform European fiscal policy should be settled before the rules are reenacted post-coronavirus crisis.

The Covid-19 Response

The Economics of the Coronavirus Crisis

Intereconomics will be publishing all coronavirus crisis related articles online first in order to provide our readers up-to-date information as this unprecedented situation continues to unfold.

Read all COVID-19 related articles

Editorial

The Political Economy of the Belarusian Crisis

While it is difficult at present to predict the outcome of Alexander Lukashenko’s fight against Belarusian society, it is useful to examine the structure of the Belarusian economy in order to better understand the country’s political economy and th inform Europe’s strategy regarding Belarus. Sergei Guriev’s Editorial details the current economic challenges facing Belarus.

Editor's Choice

Integration of Immigrants in EU Labour Markets

While the labour market integration of immigrants will likely always remain a difficult task, the authors in this Forum hope to contribute to improving this process and consequently enriching both host countries’ economies and immigrants’ lives.

Quote of the Month

"Trump’s supporters accept the gradual erosion of America’s democracy in exchange for what they believe he can do for the economy. "

from Jiffer Bourguignon's Letter from America A Vote for the Economy? A Vote Against Democracy

Online First

Libra Project: Regulators Act on Global Stablecoins

Governments, regulatory authorities and standard-setting bodies started acting on global stablecoins triggered by the Libra announcement. Among the concerns expressed by the G7 and the G20 are risks to the stability of the financial system. The Financial Stability Board and the Financial Action Task Force have worked on regulatory issues and anti-money laundering ahead of the G20 summit in November 2020. Overall the Libra project has raised many questions on the regulatory front.

Forum

Reforming EU Fiscal Rules

The approval of the recovery plan for Europe by the extraordinary Council summit in July 2020 was a major breakthrough on the path to reforming EMU economic governance. The recovery plan will alleviate the problems substantially in the short run, but it does not remove the necessity to reform fiscal rules to prevent further austerity over the medium term, writes Achim Truger. EU fiscal rules still urgently need a reform in order to strengthen the role of fiscal policy.