Image by Yanni Koutsomitis CC 2.0 via Flickr

The European Union decided in October 2015 to establish a European Fiscal Board (EFB). The EFB is an “independent advisory board on fiscal matters,” with a mandate to advise the European Commission on the “fiscal stance appropriate for the euro area as a whole,” and to evaluate the implementation of fiscal rules. So, what does this all mean? More importantly, can the EFB actually do what it is mandated to?

The European Union has long referred to a series of guidelines for managing its fiscal policy that are commonly called “fiscal rules.” These rules include maintaining annual deficits below 3per cent of GDP and debt levels below 60 per cent of GDP.

The enforcement of EU fiscal rules has not been absolute. In July 2016 Spain and Portugal were “let off the hook” when the European Commission formally recommended that the two countries not be fined for violating European Union deficit rules. Over the previous year, Spain and Portugal’s budget deficits reached 5.1 per cent and 4.4 per cent of GDP, respectively. Nominally, such an excess would fall under the Excessive Deficit Procedure (EDP) and the fine for such a violation would have amounted to 0.2 per cent of GDP, which is substantial given the low-growth environment that confronts these countries. In fact, there are six countries that currently violate the EU’s fiscal rules.

EU Member State Deficit (>3%)
Greece 7.5%
Spain 5.1%
France 5.1%
Portugal 4.4%
UK* 4.3%
Croatia 3.3%

*The status of the United Kingdom in the EU is under renegotiation due to the “Brexit” referendum.
Source: EU Statistics Office

Given the delicate balance that the European Commission has to strike between urging fiscal discipline and encouraging economic buoyancy, the Commission has adopted, in the guise of the European Fiscal Board, the model of Independent Fiscal Institutions (IFIs). What makes the EFB interesting is that it must operate as an advisory body at a supranational level, a point that makes its work considerably more complex than the IFIs commonly found at the national (as in Australia’s Parliamentary Budget Office) or subnational level (as in New South Wales’ PBO).

In theory, the idea of the EFB has many merits, including those evidenced by the work of IFIs elsewhere in the world, including the provision of independent, rigorous, and nonpartisan advice on matters pertaining to fiscal positions. IFIs have often (but not always) succeeded in providing an independent voice and in creating an “evidence-based” dialogue in the political realm.

For the EFB, this should involve the articulation of a new and nonpartisan voice in the staunchly political debate around the fiscal rules, which are protested by several member countries. Better still, it could act as a high-profile advocate for the budget offices of the individual European countries too. In a philosophical sense, the EFB is one embodiment of “fiscal” unity in an “monetary union”.

However, it is likely to face challenges on several fronts. First, the EFB does not have enforcement powers because it is not a fiscal “authority”. As a fiscal board for several countries, it has to balance the considerations of all, but cannot bind anybody to its word. There is already resentment towards the “Eurocrat establishment” in several peripheral European capitals, and the EFB is unlikely to assuage such sentiments.

Second, it is unclear what sort of relationship will exist between the EFB and national fiscal oversight bodies. It is assumed that the relationship may be one of mutual (but independent) analytical reinforcement, but as there is no precedent for supranational fiscal boards engaging with national-level bodies, these remain an open question.

Third, the question remains whether the EFB will be sufficiently resourced to do its work. Resource constraints tend to limit the ability of IFIs performing their duties to the fullest extent. As the EFB will cover a far broader mandate than any other fiscal board to date, it may require supplementary resource endowments to execute the complexity of its work. It will also require cooperation with national governments in terms of access to information and access to dialogue with national political institutions.

Finally, there is always the question of measuring the effectiveness of independent fiscal institutions, a point that receives cursory attention but that has yet to be explored in sufficient detail. How will we be able to tell if the EFB is serving its mandated purpose?

In sum, the EFB may face the same sorts of problems that IFIs do at the national level everywhere, but with the added complexity of analysing varying national member fiscal positions that constitute diverging economies and diverging national interests. This should not preclude the EFB from giving its difficult mandate a shot – the world needs more analytical rigour, not less; and it requires more fiscal discipline, not less. A successful EFB may set several good precedents in this regard.

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