In a new study requested by the ECON Committee of the European Parliament, Volker Wieland, on behalf of the Economic Governance and EMU Scrutiny Unit (EGOV), examines the application of debt sustainability analysis (DSA) within the EU's revised fiscal rules.
Titled "Debt Sustainability Analysis: Assessing its Use in the EU’s New Fiscal Rules", the study highlights the rising debt levels of member states and the need for robust fiscal rules to reverse this trend.
The fiscal framework has been revised to provide greater flexibility to national fiscal policy in the hope this will improve compliance with the rules. The debt sustainability analysis is key in providing member states with flexibility while ensuring sustainability. Yet, it is based on many unobservable inputs, seemingly complex and thus potentially subject to manipulation and bias.
Member states are required to commit to tailored Medium-Term Fiscal Structural plans that include a fiscal adjustment over 4 years. Given additional commitments to structural reforms the adjustment period can be extended to 7 years. There are some safeguards to ensure some minimum consolidation effort, such as an average annual decrease of the debt-to-GDP ratio by 1 percentage point for high-debt countries.
According to the study, the debt-sustainability analysis of the Commission is, in principle, state-of-the-art but key features and design choices in the context of the rules significantly weaken its potential to help guide member states on a path towards lower debt ratios or to help maintain debt below 60% of GDP.
While the initial guidance of the European Commission is presented in a transparent and replicable manner, this does not extend in the same way to the actual national plans that have been endorsed by the Commission. The analysis supporting national plans is not fully replicable, leaving room for manipulation. Furthermore, stress testing is applied too late and misses risks during the adjustment period. It remains to be seen whether the new framework succeeds in motivating high-debt member states to consolidate or risks complacency.
The study recommends greater transparency for national plans, earlier stress testing, and enhanced oversight by the European Parliament. It concludes that the framework’s success will depend on how well these gaps are addressed, balancing flexibility with stricter accountability to ensure long-term debt sustainability.