First published on
18 June 2018

On 18 June 2018, the European Fiscal Board (EFB) has published its assessment of the general orientation of fiscal policy in the euro area. The report concludes that the favourable economic outlook offers a prime opportunity to rebuild fiscal buffers. Especially euro area Member States with a high government debt-to-GDP ratio need to do more than simply accrue the budgetary benefits of the economic expansion. Lest we repeat the mistakes of the past and rob ourselves of room to manoeuvre when the next crisis hits, this is the time to move towards a somewhat restrictive orientation of fiscal policy in the euro area. It is also the time to upgrade the EU's fiscal framework and prepare a capacity for joint stabilisation for the euro area.

Economic activity in the euro area is expanding at a robust pace. By the end of March it had posted twenty quarters of uninterrupted growth since the end of the double dip recession in 2013, and the upward trend is set to continue. The expansion has become particularly job-rich pushing the rate of unemployment below 9%, a level last observed during the final years of the pre-2007 boom. Differences in economic growth across the euro area remain but have also abated considerably and, to a large extent, reflect structural rather than cyclical issues.

As a result of successive years of sustained output growth, the degree of economic slack has been narrowing steadily, and in 2019 the euro area is expected to operate above potential. This assessment is shared by the European Commission, the IMF and the OECD. The EFB is aware of the uncertainty surrounding estimates of potential output in real time. However, our in-depth analysis shows there is an entrenched tendency of underrating the strength of prevailing economic conditions and, consequently, to waste good times.

We have now reached a point where available evidence leaves little doubt about the strength and breadth of the ongoing expansion. The time has come to create fiscal buffers by moving from a neutral to a somewhat restrictive orientation of fiscal policy in the euro area. Especially euro area countries with a high government debt-to-GDP ratio need to do more than simply let automatic stabilisers do their work.

Implementing the rules of the Stability and Growth Pact, without recurring to additional elements of flexibility, would generate the appropriate fiscal stance for the euro area in 2019. For Member States that have not yet reached their medium-term budgetary position (MTO) - a position that ensures sustainable debt levels while offering room to manoeuvre during downturns - applying the EU fiscal rules entails additional budgetary corrections. Without such corrections we would see a return to pro-cyclical fiscal policy which will narrow policy options during the next downturn.

The current expansion is also a prime opportunity to progress with plans to complete the architecture of the euro area. The European Commission's recent proposal to establish a European Investment Stabilisation Function goes in the right direction, but the road is a long one. Due to current political and budgetary constraints, the size of the proposed instrument is exceedingly modest and some of the suggested design elements will weigh on its effectiveness. The Board is also of the view that the economic and political feasibility of a meaningful joint stabilisation function will crucially hinge on whether, in parallel, progress is made with risk reduction, notably by making the EU fiscal rules simpler and stronger.


The European Fiscal Board (EFB) is an independent body mandated to advise the European Commission on the overall direction of fiscal policy of the euro area and to evaluate how the EU fiscal governance framework is executed. It was formally established end 2015 (Commission Decision (EU) 2015/1937 establishing the EFB) and began operating shortly after its members were appointed in October 2016.

One of the main tasks of the EFB is to assess fiscal policy from the perspective of the euro area.  In the Economic and Monetary Union (EMU), Member States maintain the full responsibility for fiscal policy making subject to commonly agreed rules, the Stability and Growth Pact. The Pact guides Member States towards achieving fiscal positions that ensure sustainable debt and offer room to absorb normal cyclical fluctuations. The post-2007 crisis has shown that the pursuit of national fiscal policies in accordance with the Pact does not necessarily result in an appropriate stance for the single currency area as a whole especially when monetary policy is constrained. By throwing light on the euro area dimension, the assessment of the EFB is meant to improve the coordination of national fiscal policies in the single currency area and, ultimately, contribute to the smooth functioning of the EMU.


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