© Reuters. FILE PHOTO: European Union (EU) flags fly in front of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, July 8, 2020. REUTERS/Ralph Orlowski/File Photo
BRUSSELS (Reuters) – European Union finance ministers agreed changes to the EU’s fiscal rules to offer countries tailor-made debt reduction paths and incentives to invest.
Here’s why the rules matter.
1. The EU has a common currency – the euro – and the European Central Bank takes responsibility for a common monetary policy, but the bloc has no common fiscal policy. The fiscal rules, which limit government borrowing, are to ensure governments observe a common set of fiscal principles to prevent any irresponsible borrowing by one creating problems for all.
An example of what can happen when the rules are ignored, is the Greek debt crisis of 2010. It resulted from years of excess Greek borrowing that was hidden by falsified statistics, and almost caused the euro zone to collapse.
2. Because the rules help to coordinate national fiscal policies, they provide a counter-balance to the ECB’s monetary policy. If used correctly, the can help the ECB to achieve its inflation goal and so protect the purchasing power of EU citizens.
3. By setting limits on government deficit and on public debt, the rules aim to ensure that EU economies are stable in the long-term and avoid financial or economic crises.
4. The rules give investors confidence in euro zone assets, and the degree of predictability they give to governments’ fiscal policy decisions has a favourable impact on the prices at which EU governments borrow.
