Taking advantage of the fact that the European Union’s (EU) Stability and Growth Pact has been frozen for the remainder of 2021 and also throughout 2022, the Bank of Spain called on Monday to redesign its operations in light of its launch, already expected. in 2023. In general, the banking supervisor noted the need for a “paradigm shift” in the design of the EU’s fiscal policy framework, bearing in mind the need to incorporate improved management of financial rules, which should be “simpler, more practical and credible than the current ones” .
This was announced by the body chaired by Pablo Hernández de Cos in the spin-off “Reforming the Federation’s Fiscal Policy Governance Framework in a New Macroeconomic Environment”. In it, the supervisor asserts that the fact that “the European framework of financial rules has been suspended, due to the application of the general protection clause, and that there is no fixed date for a return to normal, opens a window of opportunity for reform”.
The main proposals of the Bank of Spain affect the simplification of rules to provide them with greater transparency and flexibility, as well as the inclusion of new transnational instruments for risk sharing, in particular to facilitate the absorption of severe shocks. It also insists that the financial elements should be accompanied by additional measures, both at the national level with structural reforms and at the community level, for which it is proposed to complete the banking union and advance the capital market union.
In this section, the Bank of Spain also believes that “supranational” risk-sharing elements that allow the proper operation of the policy mix Between monetary and fiscal policies, with a common vision for the eurozone.
Although this is the time to address these actions, the supervisor cautions that there are many challenges that, in the current situation, pose any reform process. Among them, he notes, “the underpinnings of medium-term debt must adjust to medium- and long-term expectations about interest rates and potential growth.”
Meanwhile, the report warns that economies may continue to experience “extremely severe shocks,” indicating the need to restore room for fiscal policy in the medium term. In the context of promoting changes, the Bank of Spain notes that structural trends such as digitization, globalization, climate change or population aging are becoming clear or uniform, affecting natural interest rates and potential growth. “The new global macroeconomic context and the experience of the past 25 years point to a paradigm shift in the design of the governance framework.”
In the document, the Bank of Spain also revealed the desirability of reconsidering the role of independent financial institutions at the European level compared to national institutions. As he said, in a context in which supranational elements are gaining more importance, it would be appropriate to strengthen the role of national financial institutions, the first line of control of governments, as well as their coordination with similar institutions at the European level.
It also encourages a rethinking of correction models when a country veers off course. Today, the supervisor asserts, “current fiscal rules provide mechanisms for correcting excessive levels of deficit or debt, but not for correcting national actions that are inconsistent with the scope of fiscal tone desired at the macro level.”
Last June, the European Commission formally proposed to member states to freeze the entire 2022 Stability and Growth Pact, which had already been suspended during 2021 as a result of the Covid crisis. Extending the suspension of these rules, which set limits of 3% for the deficit and 60% for the state’s public debt, will allow the partners to continue to strengthen the stimulus measures of their economies and, in turn, will bring with it, in turn, the discussion about a possible reworking of the agreement, which many partners, including Spain, consider outdated. Vice President Economic, Nadia Calvino, has already emphasized on several occasions that the rules “do not respond, in practice, to the realities of the Spanish and other European economies. They do not adapt to the current economic and financial realities, which have evolved a lot since their creation ”in 1997.
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