Benoît Coeuré: The importance of independent fiscal councils
Opening remarks by Mr Benoît Coeuré, Member of the Executive Board of the European
Central Bank, at the workshop on "Fiscal councils, central banks and sound public finances",
Frankfurt am Main, 27 January 2016.
* * *
Summary
Setting the stage for a workshop at the ECB on fiscal councils, central banks and sound public
finances, Benoît Coeuré underlines in his opening remarks that sound public finances in all
euro area member countries is a precondition for completing Economic and Monetary Union.
Even if these days "there is no appetite for moving towards a 'United States of Europe'", he
says, "there is a common understanding" that euro area member countries need to further
integrate their fiscal and economic policies. Benoît Coeuré focuses on the requirements that
need to be met for national fiscal councils and the European Fiscal Board (EFB) to be fully
effective. "Independence" is the key word at both national and European levels. The EFB is
also charged with the important task of coordinating fiscal policy in the euro area to avoid
procyclical fiscal policies. "At this juncture using fiscal space would speed up the euro area's return
to growth and support the ECB's objective of medium-term price stability", says Benoît Coeuré.
"But, in many countries, such fiscal space simply does not exist, because rules have not been
enforced in the past. Setting up independent institutions such as the fiscal councils at the
national level and the EFB at the European level could prove to be a decisive step in this
direction."
* * *
Dear guests from the Network of EU Independent Fiscal Institutions,
Dear colleagues from the European System of Central Banks,
Ladies and gentlemen,1
It is a great pleasure for me to open this high-level workshop.
The European sovereign debt crisis has reminded us painfully that sound public finances in all
euro area Member States are an indispensable prerequisite for the smooth functioning of the
European monetary union.
This has, of course, been well understood for a long time. For example, the Delors Report of
1989 stressed that "uncoordinated and divergent national budgetary policies would undermine
monetary stability and generate imbalances in the real and financial sectors of the
Community."2
To address these concerns the Maastricht Treaty introduced a number of safeguards: the
nobail-out clause, the excessive deficit procedure and the monetary-financing prohibition. Yet,
for well-known political reasons, the Maastricht Treaty stopped short of assigning responsibility
for fiscal and economic policies to the central level. Member States retained responsibility for
these policy fields. At the same time, the Treaty called on governments to treat such policies
as a matter of common concern. It also entrusted the task of ensuring appropriate coordination
of national policies to the European Commission.
In the monetary field, a new, fully independent body was created, namely the European Central
Bank. The responsibility for the conduct of euro area monetary policy was delegated to the
ECB's Governing Council. At the same time the independence of national central banks was
strengthened considerably in many countries. The institutional set-up for monetary policy was
thus starkly different from that for fiscal and economic policies.
The crisis exposed the flaws in the set-up governing fiscal and economic policies. Over the
past six years there have been numerous initiatives to rethink the fiscal and economic
governance framework. The political reality is that there is no appetite for moving towards a
"United States of Europe", as foreseen by Victor Hugo and Winston Churchill, and envisaged
by Jean Monnet at the beginning of the 1950s, when the precursor of the European
Commission was created (the High Authority of the European Coal and Steel Community).3
However, there is a common understanding that euro area Member States need to further
integrate their fiscal and economic policies if the euro area and its member countries are to
prosper in the future. This point is made forcefully in the Five Presidents' Report which was
published in June last year.4
The Five Presidents' Report proposed a multi-stage process towards genuine Economic and
Monetary Union (EMU). The first step is to revive economic convergence among Member
States. This requires Member States to put their public finances on a sound footing. It also
requires Member States to undertake the necessary structural reforms to strengthen their
growth potential and resilience to shocks. Making determined progress in these fields is an
economic and political precondition for moving on to the second stage, for which a joint
shockabsorption mechanism could be envisaged.5
In this respect, I am convinced that national independent fiscal institutions and the European
Fiscal Board can make decisive contributions to the success of stage one when it comes to
ensuring responsible fiscal policies.
Of course, there are important differences between monetary and fiscal policies in terms of the
potential for delegation to technocrats. Monetary policy is a technical task aimed at minimising
market distortions and undesirable economic fluctuations. In order to overcome commitment
problems, central banks were made independent and provided with a price stability mandate.
By contrast, fiscal policy has strong allocation and redistribution dimensions, which need to
reflect national political preferences. Accordingly, fiscal policy has remained the innate
prerogative of democratically elected governments. This is supported by the findings of the
political-economy literature, which points to the need for limits on the delegation of these
policies to independent experts.6 Proposals have been made to set up independent fiscal
agencies with a clearly defined and limited role, such as deciding on the overall fiscal balance,
and then leaving it to the political system to decide on taxes and expenditures7, but they have
not gained much traction.
3
See Monnet, Jean (1952), "The United States of Europe", in The United States of Europe has begun: The
European Coal and Steel Community - Speeches and Addresses 1952-1954, pp. 58-60.
4
See Juncker, Jean-Claude, Tusk, Donald, Dijsselbloem, Jeroen, Draghi, Mario and Schulz, Martin (2015), The
Five Presidents' Report: Completing Europe's Economic and Monetary Union, June.
5
On convergence in the euro area, see Coeuré, Benoît (2016), Rebalancing in the euro area: are we nearly there
yet?, speech at the Danish Economic Society, Kolding, 15 January.
6
Alesina, Alberto and Tabellini, Guido (2007), "Bureaucrats or Politicians? Part I: A Single Policy Task", American
Economic Review, Vol. 97(1), pp. 169-179; and Maskin, Eric and Tirole, Jean (2004), "The Politician and the
Judge: Accountability in Government", American Economic Review, Vol. 94(4), pp. 1034-1054. Both papers
point to the conclusion that, albeit technical, fiscal policies are intrinsically redistributive and should therefore be
made by elected representatives.
7
Wyplosz, Charles (2005), "Fiscal Policy: Institutions versus Rules", National Institute Economic Review,
Vol. 191(1), January, pp. 64-78.
In any case, there is general agreement that independent fiscal councils can play an important
role in overcoming the commitment problems which often prevent governments from pursuing
sound fiscal policies in a time-consistent manner.8 Importantly, this argument holds true both
when the commitment problems arise from policy rules and when they result from discretionary
decisions. Therefore, fiscal councils are likely to play a key role in any evolution in the
institutional set-up of the euro area, including moving from rules-based to institutions-based
fiscal decision-making.
In the remainder of my remarks, I would like to focus on the general requirements that need to
be met for national fiscal councils and the European Fiscal Board to be fully effective.
The key role of national independent fiscal institutions
The European Union fiscal governance framework was strengthened with the "six-pack" and
the "two-pack" legislation. The two-pack introduced a requirement for euro area countries to
set up an independent body, such as a fiscal council, that is responsible for monitoring
compliance with numerical fiscal rules. Moreover, it also required that macroeconomic
projections should be produced or endorsed by an independent body.
In doing so, fiscal councils can ensure transparency on rules and their implementation.
Moreover, fiscal councils can foster national ownership of the governance framework and
increase the reputational cost to governments when they violate the fiscal rules.9 Unfortunately,
regulation that is jointly agreed at the European level is often portrayed as having been
imposed by "Brussels". Members of national fiscal councils - particularly if they build up a good
reputation - can counter this argument by explaining the economic virtues of a
stabilityoriented fiscal policy framework.
To effectively deliver on their tasks, fiscal councils need to build and maintain strong
institutional credibility. This requires insulation from political interference, and it is here that the
experience of independent central banks can provide important lessons.
First, similar to central banks, fiscal councils require institutional independence. That is, they
should have a legal identity which is separate from other bodies of government. At the same
time, it should be ensured that fiscal councils have broad and timely access to information,
particularly detailed budgetary data.
Second, fiscal councils should be functionally independent. They should be free to choose how
to assess and communicate on fiscal policies. Importantly, fiscal councils need to be able to
communicate publically in order to effectively mobilise public opinion and, if necessary, to
counteract political incentives for unsound fiscal policies.
Third, decision-makers in national fiscal councils require personal independence. They should
be appointed on the basis of their professional qualifications for a fixed term. They should be
relieved of their duties only in exceptional circumstances, for example if they no longer fulfil
the conditions required for the performance of their duties or if they have been found guilty of
serious misconduct.
Fourth, fiscal councils require financial independence. That is, they require sufficient resources
to deliver on their mandate. To this end, the financing of independent fiscal institutions should
be outside of the government's immediate discretion. They could, for example, be funded
directly by parliament rather than from the government budget.
Evidence suggests that, where these principles of independence are met, fiscal councils can
improve budgetary discipline.10
Complementing national independent fiscal institutions with the European Fiscal
Board
Ensuring sound public finances in Europe will also require changes to the EU's fiscal
governance framework. European legislators should make it a priority to reduce the excessive
complexity of the rules. A lack of transparency can make fiscal rules appear arbitrary and
undermine their legitimacy. A review of the fiscal rules should add clarity and facilitate the
assessment of compliance with them, while preserving their stability-oriented nature. The
International Monetary Fund has made such proposals in the past.11 The European
Commission has announced that it will come up with proposals to simplify the framework
soon.12
It can be argued that complexity results from a lack of trust in the institutions in charge of
enforcing the rules, preventing full delegation and making it necessary to write an
allencompassing contract that covers all possible states of the world. The institutional set-up
therefore needs to be strengthened.
In October last year the European Commission published a decision setting up a European
Fiscal Board (EFB).13 In line with the recommendations of the Five Presidents' Report, the EFB
should provide an independent assessment of the Commission and the Council's application
of the Stability and Growth Pact. While the European Commission should continue to enforce
these rules, it should provide a justification where it deviates from the views of the EFB. This
will help to increase the transparency and consistency of fiscal surveillance at the European
level.
Beyond fiscal surveillance, the EFB can also play an important role in fiscal policy coordination
in the euro area. The sum of national budget balances should lead to an appropriate fiscal
stance at the level of the euro area as a whole. While effectively steering the euro area's fiscal
stance will be challenging as long as there is no central fiscal capacity, coordinating national
fiscal policies is key to avoiding pro-cyclical fiscal policies and facilitating the smooth
functioning of EMU.
When defining the role of the EFB, we have to acknowledge that there may be a trade-off
between the breadth of its mandate and the effectiveness of its actions. This should be taken
into account when thinking about the allocation of tasks between the EFB and national fiscal
councils.
You will have the opportunity for an in-depth discussion on the EFB's set-up and its mandate
in one of the sessions. In my view, the following questions are of particular interest: Is the EFB
sufficiently independent to fulfil its tasks? Are there conflicts between the main elements of the
10
See ECB (2014), "Fiscal councils in EU countries", Box 8 in the Monthly Bulletin, June, pp. 96-100; Nerlich,
Carolin and Reuter, Wolf Heinrich (2013), "The design of national fiscal frameworks and their budgetary impact",
ECB Working Paper Series, No 1588; Debrun, Xavier, Hauner, David and Kumar, Manmohan S. (2009),
"Independent Fiscal Agencies", Journal of Economic Surveys, Vol. 23(1), pp. 44-81; and ECB (2009),
"Experience with government debt reduction in euro area countries", Box 10 in the Monthly Bulletin, September,
pp. 84-86.
11
Andrle, Michal, Bluedorn, John, Eyraud, Luc, Kinda, Tidiane, Brooks, Petya Koeva, Schwartz, Gerd and Weber,
Anke (2015), "Reforming Fiscal Governance in the European Union", IMF Staff Discussion Note, SDN/15/09.
12
See European Commission (2015), On steps towards Completing Economic and Monetary Union, COM(2015)
600 final, 21 October.
13
See Commission Decision (EU) 2015/1937 of 21 October 2015 establishing an independent advisory European
Fiscal Board, OJ L 282, 28.10.2015, p. 37-40.
EFB's mandate? How can we ensure that the EFB complements and reinforces the role of
national independent fiscal institutions?
Overall, we are all hoping that the European Fiscal Board will contribute to better compliance
with the common fiscal rules, a more informed public debate and stronger coordination of
national fiscal policies.
To achieve these objectives, the EFB should not fall short of the principles established in the
context of the creation of independent fiscal councils at the national level. Looking ahead the
mandate and institutional independence of the EFB should be clarified and strengthened to
ensure that it can play a key role in increasing transparency and improving compliance with
the fiscal rules.14
Conclusions and outlook
Let me conclude.
I have argued that, in the light of the European sovereign debt crisis and persistent
sustainability concerns, it is more important than ever to make a credible commitment to
stability-oriented fiscal policies. This is a necessary condition for fiscal policy to be in a position
to support and complement the ECB's monetary policy.15 We can see today how much a lack
of compliance with the rules has hampered the euro area's ability to deliver an efficient
macroeconomic policy stance. At this juncture using fiscal space would speed up the euro
area's return to growth and support the ECB's objective of medium-term price stability. But, in
many countries, such fiscal space simply does not exist, because rules have not been enforced
in the past. Setting up independent institutions such as the fiscal councils at the national level
and the EFB at the European level could prove to be a decisive step in this direction. While
achieving credibly sustainable public finances is an important goal in itself, it is also the
precondition for completing EMU.
In today's workshop, you will discuss in much more detail some of the critical issues that I
touched upon in my opening remarks: Where do we stand with the establishment of
independent fiscal institutions in European countries? What experience do we have in terms
of the effectiveness of fiscal councils in European countries? How should fiscal rules be
designed in order to make them transparent and enforceable? How should the responsibility
for fiscal policies be divided between the national and the European levels?
I am looking forward to hearing some fruitful discussion. Thank you very much for your
attention.