Good morning, ladies and gentlemen.

Thank you Niels, and thank you for inviting me to speak to you today.

The world has changed a great deal since the European Fiscal Board held its last annual conference. The onset of the pandemic has brought us challenges that we could not have imagined or predicted one year ago.

However, as we can see from today’s conference topic, some of these challenges are not really so new. High debt, low rates – whether of growth or of interest – are quite familiar territory.

We were aware of them well before the pandemic began.

A little more than a year ago, the Commission presented its assessment of the effectiveness of the current economic governance set-up. The European Fiscal Board provided valuable input for this exercise. The assessment identified several challenges.

To begin with, while overall deficit and debt levels had fallen, public debt had been stubbornly high in some Member States before this crisis.

Frequently, the national fiscal stance had been pro-cyclical.

This was because compliance with the rules was heterogeneous - and especially because the good times were not used to build buffers.

And since consolidation was largely achieved by reducing investment, the composition of public finances had not become friendlier to growth or investment.

During upturns, extra revenues flowing in were not used to invest.

In addition, the framework has grown increasingly complex over the years.

Since we carried out that review, the pandemic has changed its context significantly.

  • Deficit and debt levels are now higher.
  • Output has fallen sharply and will take time to recover.
  • The need for adequate investment has become very clear. That is why we created powerful EU instruments such as the Recovery and Resilience Facility.

In fact, the crisis has shown how important it is to tackle many of the challenges that the Commission was keen to address in the public debate that was meant to follow the review last year.

Relaunching the debate on the future of our economic governance will allow us to reflect on all this, and also take our experiences from the COVID crisis into account. We intend to proceed with the public debate once the recovery takes hold.

I know that the speakers and panelists speaking today will provide valuable input for this collective reflection so that we can build a renewed consensus on the fiscal framework.

And consensus is crucial. A fiscal framework can only be effective if there is strong political commitment to adhere to it.

This means that whatever we do with our framework, we need to make sure that we end up in a place where there is more political commitment than now.

So how do we achieve that higher, necessary degree of commitment?

First, we should agree on the main objectives: where to focus, and what to achieve.

I know that this question is contentious.

That should be no surprise: there has probably never been a full convergence of views on this since the inception of the Stability and Growth Pact in the late 1990s.

Over time, our fiscal framework has grown to serve an increasingly wide range of objectives. In itself, that could be an issue to reflect upon. Perhaps ‘less is more’.

It began as an instrument that was meant to avoid inconsistencies between decentralised fiscal policies and a single monetary policy.

Now, it is an all-embracing tool to address sustainability and stabilisation needs, and to incentivise reforms and investments.

We are now considering to what extent it should pay more attention to investment and growth, or to challenges such as the green and the digital transitions.

As I mentioned, the framework has become too complex.

With this in mind, we should now reflect on the best ways to achieve all these different objectives.

One avenue for simplifying the framework would be to move away from indicators that are not directly observable, such as output gaps and structural balances.

Another important element is to make sure that the framework delivers sustainable fiscal positions in all Member States. We need a credible debt anchor that is adhered to.

These ideas reflect what the European Fiscal Board already said in its September 2019 report.

But it is clear that these discussions will take some time – and here the European Fiscal Board will play an important role in driving forward our collective reflection.

For now though, the priority is to tackle the pandemic and its socio-economic fallout. We are focused on addressing the health emergency, getting the recovery right and preparing for the future.

While the pandemic continues to determine our socio-economic outlook and creates high uncertainty, the Commission’s winter forecast shows that at last, we are turning the corner in overcoming the crisis.

Growth should gather momentum as vaccination campaigns advance, the pressure on public health systems starts to subside and containment measures ease.

GDP is now expected to exceed pre-pandemic levels slightly by the end of the forecast horizon, in both the EU and euro area.

At the same time, the recovery is likely to be uneven across EU countries.

We should remember, however, that the crisis impact would have been much worse without the unprecedented efforts made by the EU’s institutions and Member States.

This has been helped, without doubt, by a smooth interaction between monetary and fiscal policy.

National fiscal measures amounted to some 4% of GDP in 2020, adding to automatic stabilisers of around the same size. In addition, guarantees for about 19% of GDP were provided.

While some emergency measures will gradually expire or be replaced by others, national support remains sizeable.

This substantial response was facilitated in no small part by activating the general escape clause of the SGP early in the pandemic.

It showed exemplary coordination - which we should now extend into the next phase of the crisis throughout the recovery.

Here, I would like to make three points:

First: to avoid more permanent damage to the economy, fiscal support should not be withdrawn prematurely. Support measures should continue for as long as needed.

They should be targeted as well as temporary, so that we avoid creating a permanent burden on public finances.

Continuing or deactivating the general escape clause as of 2022 should therefore depend on the state of the economy, using well-defined criteria.

Then: there is also broad agreement that once health risks diminish, fiscal measures should gradually turn away from income support to more targeted measures that promote a resilient and sustainable recovery and prepare for the future.

Lastly: gradually, national policies will need to become more differentiated. Economic conditions, the degree of uncertainty as well as fiscal sustainability considerations should guide this differentiation.

What is also clear is that - at some point - both fiscal and monetary policy support will have to be gradually withdrawn. We are not there yet, of course.

But we cannot ignore the fact that, when the moment is right, Member States will again need to pursue fiscal policies aiming to achieve prudent medium-term fiscal positions.

It is important to do this in a coordinated way, and with the right sequencing.

As the paper by Kenneth Rogoff indicates, we should not over-rely on interest rates continuing to stay very low. While they may well stay low for some time to come, we cannot take this for granted.

We have also learned - and this is documented in the Public Finance Report that comes out today - that a fall in interest rates does not automatically lead to debt reduction.

We will still need to put the right policies in place, and at the right moment.

To facilitate the coordination exercise for the period ahead, next week the European Commission will present guidance that should help Member States to prepare the Stability and Convergence Programmes and continued coordination of fiscal policies.

An important element is the interaction between Member States’ fiscal policies and operations of the Recovery and Resilience Facility.


Ladies and gentlemen

This brings me to the last topic that I would like to raise today: the importance of the Recovery and Resilience Facility – or RRF - to help Member States get through this crisis.

The RRF is now in force: one year after the pandemic first struck in Europe, and at a moment when the recovery has yet to take off. This is remarkable speed and a remarkable achievement.

It offers a unique chance to ensure a sustainable and inclusive recovery and transform our economies, while preparing them for a green and digital future. It must be used well.

Developing high-quality national recovery and resilience plans with a long-lasting impact will be key to the overall success of the RRF.

For this to happen, we need the right balance between reforms and investment - along with a high level of ambition.

The national plans must address all, or a significant subset of the challenges in the country-specific recommendations.

Our watchword in the months ahead will be implementation: making the best use of these substantial funds to help each country’s long-term recovery.

If spent well, the RRF grants will make it possible for Member States to support the economic recovery and stimulate higher potential growth by carrying out high-quality investments and reforms.

At the same time, since RRF grants do not add to national deficits and debt, they can improve their own fiscal positions.

This will make the job of national fiscal policies easier and contribute significantly to improving fiscal sustainability.

Given the current context of low growth and high debt, that effect should not be underestimated.

This is why it is important for Member States, when they design their medium-term fiscal strategies, to bear in mind the interaction between the RRF and nationally financed spending.


Ladies and gentlemen: the European Fiscal Board has a long history in providing useful contributions to the policy debate.

I know that your input will be valuable in helping us to address many questions that face us regarding fiscal policy in the period ahead and the future of our fiscal rules.

Thank you very much and I wish you a very successful conference.