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By Tobias Tesche

Mind the compliance gap

The Stability and Growth Pact (SGP) has been plagued by chronic non-compliance and a lack of local ownership of the fiscal rules. To remedy this dysfunctional state of affairs a technocratic consensus has emerged between the European Commission, the ECB, the IMF and the OECD that fiscal councils could provide an institutional fix. Fiscal councils are supposed to disseminate impartial information about the ‘true’ state of public finances. By making fiscal policy more transparent a fiscal council enables intermediaries like the media, voters, politicians or credit rating agencies to adequately judge the competence of a government regarding its fiscal stance. Thus, fiscal councils have the capacity to orchestrate fiscal discipline with a relatively small budget and a ‘thin’ legal mandate. This indirect way of governing can be often found in areas which are considered sovereign powers.

 

Drivers behind the spread of fiscal councils

The Global Financial Crisis and the subsequent euro area crisis have propelled the spread of fiscal councils in the European Union. Increasing debt levels required crisis-stricken countries to credibly commit themselves to refrain from fiscal profligacy. For this reason, establishing a fiscal council was an iron-clad provision of the MoUs negotiated by the troika. However, it was not at all clear how these new institutions should be designed. As a result, a large variance exists at the national level with regards to the design features of a fiscal council. How do we explain the absence of a one-size-fits-all fiscal council? When the independent central bank model swept across Europe member states followed the trusteemodel, i.e. in order to make their commitment to an anti-inflationary monetary policy time-consistent the central bank had complete control over monetary policy. Why shouldn’t this model also be applied to fiscal policy? On the one hand, having technocrats carrying out fiscal policy would raise serious democratic legitimacy issues. On the other hand, if the fiscal council acts merely as the agent of the government, it will be difficult to acquire a reputation for being an impartial watchdog. Furthermore, until central banks started to experiment with unconventional monetary policy measures, the distributional consequences of monetary policy were assumed to be moderate and widely dispersed and, therefore, enabled its delegation to technocrats. The distributional consequences of fiscal policy are observable and make it harder to justify its delegation to independent experts.

The Troika and its permanent institutional legacy

The three troika institutions which were the strongest advocates of fiscal councils had very different institutional self-interests that strongly influenced their ideas about how fiscal councils should function in practice. The European Commission wanted to increase the compliance with the fiscal rules but not at the expense of losing its prerogative of interpreting the fiscal rules. The ECB wanted to permanently enshrine monetary dominance in EMU’s governance architecture and the IMF was interested in the repayment of its financial assistance. These diverging goals ultimately determined what the respective institution considered a desirable level of independence for a fiscal council. But the cacophony of voices also prevented the emergence of a one-size-fits-all fiscal council model. When governments were confronted with the legal obligation to create a ‘functionally-autonomous’ fiscal council, they had the leeway to put in place a fiscal council that would not overly constrain the government and retain its ability to make distributional choices. This explains why the task of fiscal councils is often limited to monitoring the compliance with the fiscal rules and to assess or produce the macroeconomic forecasts. Very little room exists to enforce the compliance with the rules other than raising the reputational costs of fiscal profligacy. In most countries, a so-called ‘comply-or explain’ rule that would force the government to respond if it is at odds with the fiscal council’s assessment is not in place.

The European Fiscal Board (EFB) as a Supranational Orchestrator of Fiscal Discipline

At the supranational level, the advisory European Fiscal Board (EFB) was established in 2015 based on a Commission decision to monitor the compliance with the fiscal rule framework. The EFB can make specific recommendations under the SGP if it sees risks to the proper functioning of EMU. Initially, the EFB was supposed to rely on the national fiscal councils to orchestrate fiscal discipline indirectly. However, national fiscal councils were adamant that they did not want to be brought under the hierarchical control of the Commission. To further build up their reputation and to foster their fragile operational independence, they created a horizontal network of national fiscal councils to exchange best practices. Ultimately, this emerging technocratic order could provide the nucleus for further fiscal integration in the future. It points to an increasingly visible trend in the ‘agencification’ of EU executive governance, namely, that agencies are relying to an ever larger extent on the expertise at the national level to govern effectively.

Tobias Tesche is a PhD Candidate in Political Science at the European University Institute in Florence, Italy. His research deals with the political economy of fiscal councils, the European banking union and the ECB. You can follow him on Twitter @tobias_tesche

 

 

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