Proposal of G. Stournara for permanence of the Recovery Fund

By Tasos Dasopoulos

The Governor of the Bank of Greece, Giannis Stournaras, proposes the permanence of the Recovery Fund mechanism as a “fiscal capacity tool” that will prevent fiscal crises, while outlining the changes that should be made to the Stability Pact.

The governor’s interim report released yesterday emphasizes that in the long run, the creation of a permanent central fiscal capacity tool contributes to a more effective response to external disturbances and to the faster and smoother convergence of economies.

In fact, the report considers that the creation of the Recovery and Sustainability Mechanism, by issuing a common European debt to finance public investment, is a first step towards a fiscal union.

Such a prospect is expected to benefit more indebted countries, such as Greece, by ensuring lower borrowing costs and ensuring greater fiscal discipline, as there will be investment resources that will correct external differences more quickly.

Changes in fiscal rules

At the same time, the report includes an outline of the changes that should be adopted in the financial rules. As it is emphasized, in the post-covid era, the adoption of credible and effective fiscal policies, aimed at the sustainability of public finances, is considered more necessary. This is all the more necessary in countries with high public debt, such as ours, which are becoming more vulnerable to potentially negative economic turmoil.

The report identifies in the current context design and implementation errors that became apparent before the pandemic.

In the context of the dialogue that has started and will enter its most essential stage in 2022, it is emphasized that emphasis should be placed on two main features: (a) a fiscal objective, which will determine the medium-term planning of fiscal policy, and (b) an operational fiscal rule as a means of achieving this goal.

Growth instead of primary surpluses

At the same time, the BoG argues that the approach to debt adjustment should be counter-cyclical, ie that debt reduction should be done only by stimulating growth by rejecting the restrictive policies imposed by the current set of rules.

That is, when a country is in recession, it should be allowed to increase its investment spending in order to achieve growth and be able to reduce its debt. “In the past, the rules of the Stability Pact have not prevented hyper-cyclical policies. The result has been a worsening of debt dynamics, as the recessionary impact of overly restrictive fiscal policy in times of crisis has effectively offset some of the positive contributions of the constraint.”

Respectively, the creation of primary deficits (or smaller surpluses) in periods of high growth canceled out part of the positive contribution of growth to the dynamics of debt. The BoG is therefore in favor of supporting the development of heavily indebted Member States, rather than fiscal constraints, as it is more effective in reducing debt. guarantees a sustainable downward trend in public debt “.

The BoG seems to disagree with the restrictive policy and the obligation for debt reduction surpluses. some countries, with self-defeating results, as it would burden their growth potential.

It supports the control of the growth rate of public expenditure as a basic fiscal rule, as it has proven to be an effective rule for implementing fiscal discipline.

It also bids for the special treatment of investment costs and / or costs related to climate change, so as not to cut productive public spending with a high multiplier effect.

Finally, he stressed that the speed of adjustment to the medium-term fiscal target plays an important role, as the course of economic recovery should be preserved, but also the observance of the rules without accepting the 20-year rule provided by the current framework.