The Commission’s proposal improves automaticity to some degree. That is, the excessive deficit procedure (EDP) for breaches of the debt criterion (the so-called “debt-based EDP”) would be strengthened such that departures from the agreed spending path would automatically trigger the opening of an EDP whenever the Member States face a substantial public debt challenge or the departures from the agreed spending rule give rise to so-called “gross errors”. Meanwhile, the EDP would remain unchanged for breaches of the 3% of GDP deficit reference value and the new framework would strengthen compliance by introducing new reputational sanctions. But the effective application remains to be seen. We need to remain particularly vigilant on these factors, which have contributed to the failure of past reforms. In this case, an enhanced role for independent fiscal institutions should be envisaged. History and practice have shown that well-designed independent fiscal councils can enhance the accuracy of fiscal forecasts and improve compliance with fiscal rules.8 Therefore, the reform should encourage the strengthening of independent fiscal institutions, with the final objective of giving them a formal role on the assessment of compliance with the fiscal framework. Another key aspect is simplicity, while preserving a sense of realism. An overly complex and non-transparent framework hinders the effectiveness of the rules. Moreover, a simpler fiscal objective increases the credibility of the rules and strengthens their governance. In this sense, the reform proposal by the Commission suggests a simple expenditure rule together with a sustainability anchor, based on a debt sustainability analysis framework.

A series of factors – first and foremost, in the case of the euro area, the Russian invasion of Ukraine - are responsible for these adverse economic dynamics and for the surge in inflation to levels that we had not seen for decades. Accordingly, central banks, including the ECB, have responded swiftly to the inflationary pressures, tightening financing conditions for both private economic agents and the government. Moreover, these shocks have thrown into stark relief European vulnerabilities in key areas, such as the energy sector, as well as the considerable disparities among countries in their relative exposure to them. And this is happening against the background of an increase in euro area public debt by almost 10 percentage points (pp) of GDP since the pandemic, leading to high debt-to-GDP ratios and high structural deficits in some countries that have shrunk the available fiscal space and represent an important vulnerability. All these elements underline the importance of achieving the correct monetary and fiscal policy mix in order to face this complex context. The current circumstances differ substantially from those prevailing at the outbreak of the COVID-19 pandemic. The pandemic confronted us with a severe, albeit temporary, exogenous shock, which was probably the biggest supply and demand shock we had faced in decades. In that context, a coordinated fiscal and monetary policy response was absolutely necessary to support the incomes of both households and firms, and to minimise the potential structural damage to employment, productive capacity and economic growth caused by the crisis.