6  See the Eurosystem reply to the Communication from the European Commission “The EU economy after COVID-19: implications for economic governance” of 19 October 2021  7  See, for example, Lorenzoni, G., F. Giavazzi, V. Guerreri and L. D’Amico (2023). “New EU fiscal rules and governance challenges”, VoxEU Column, 2 January 2023; Blanchard, O., A. Sapir and J. Zettelmeyer (2022). “The European Commission’s fiscal rules proposal: a bold plan with flaws that can be fixed”, Realtime Economics Blog, Peterson Institute for International Economics, 30 November 2022; and Wyplosz, C. (2022). “Reform of the Stability and Growth Pact: The Commission’s proposal could be a missed opportunity”, VoxEU Column, 17 November 2022. 6  Second, the fiscal rules must be able to avoid the traditional pro-cyclical behaviour of public finances. Ideally, fiscal rules should foster savings during expansions and support growth during recessions. Clearly, the existing framework has not been able to do so, contributing to the undesirable increase in public debt levels that we have seen. It would therefore be desirable for the new framework to incorporate a clear incentive scheme to boost efforts to consolidate public finances when the economy is doing well, so as to provide room for manoeuvre in times of crisis. It should combine positive incentives such as allowing countries to design the fiscal consolidation path - and negative ones – like an improved regime of sanctions, including restrictions on the access to EU funds. Third, greater compliance can be achieved with rules that are more automatic.

In the aftermath of this crisis, this shortcoming again became evident when the degree of fiscal policy coordination provided for in the fiscal framework fell short of the aggregate stimulus that was needed to complement monetary policy in a low inflation environment. That said, we should commend the way in which the fiscal policy response during the pandemic learned from past experiences. Temporary, centralised fiscal instruments were put in place to complement the activation of the SGP escape clause, which allowed for highly expansionary national fiscal policy stances. If we were to draw one lesson from this brief historical detour, it could be that, beyond its foundational components, the fiscal governance framework embedded in the Treaty has been continually adapted to a changing environment. Significant headway has been made, particularly in times of crisis. However, the successive reforms have not addressed all of the pending issues. Beyond the undoubtedly successful and appropriate coordinated action during the pandemic, varying degrees of improvement could be made to the current policy mix’s underlying design. Moreover, the huge need for fiscal support during the pandemic forced the suspension of the fiscal framework and led to a significant increase in the level of public debt, greatly reducing the fiscal space, against a background of pressing long-term public investment needs in the fields of digitalisation and climate change. In this context, high inflation and the shift towards a restrictive monetary policy might encourage financial markets to pay more attention to debt sustainability concerns.