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Roel Beetsma was interviewed earlier this month on the subject of reforming the European growth and stability pact after an economic crisis. The interview was published on the website of the French newspaper L'Opinion and the article below is an unabridged translation of the interview.

Beetsma, a professor of Macroeconomics at Amsterdam School of Economics, is also a member of the European Commission's European Fiscal Board (EFB).

Is it necessary to reform the stability and growth pact ?

Typically what you see is that after a crisis, public investment falls or is lower than before the crisis. EFB reports comparing public investment levels show it's lower after a global financial crisis than before, especially with high debt countries like Italy and Portugal.

As members of the European Fiscal Board, we have been advising the European Commission for a change in the stability and growth pact and for what we call a modified golden rule, which tells that the growth ceiling on public spending that we propose (that we propose to replace the structural balance as steering variable) is relaxed to make room for public investment.

We are aware of the drawbacks: once you allow for a relaxation of fiscal rules for investment, governments have an incentive to reclassify spending as investment. So we suggested that the modified golden rule should only apply to investment already classified as such by the Commission. For instance, the investment projects financed by the Structural Funds, which have been investigated for their fulfilment of the relevant criteria. Co-financing that comes from the country could be exempted from the fiscal rules. Those projects could even be topped up by the governments, allowing for a higher spending ceiling.

What are some examples of those investments? Is it easy to differentiate between investment and current spending?  

Typical investments are infrastructures: roads, electricity grids, railways, school buildings or government buildings.  On the contrary, wages for teachers are not classified as investment, even though they are growth friendly. Ideally you would allow the fiscal rules to be flexible for any type of growth friendly public spending. But when we are talking about infrastructure spending, it is clear that it is investment and that is has growth benefits. Whereas for current public spending, it is more difficult to establish unambiguously that it is fostering growth. Because governments have types of spending that they like and would like to establish as growth friendly. So, you have to make a trade- off, between allowing for spending that is growth friendly and making sure that what is presented is indeed growth friendly. So, it is easiest for investment like infrastructures.

Do the current fiscal rules deter investment?

Current EU fiscal rules already allow some flexibility for public investment and structural reforms. Fiscal rules consist of a preventive arm and corrective arm; in the preventive arm, governments are supposed to improve their structural balance, which as a rule has to improve by 0.5% of GDP when it is too low. But you have flexibility for public investment that can account for up to about 0.2% of GDP. It’s not that small.  However, in practice, countries have hardly called on this option and they have not really made use of this flexibility. They have several other flexibility provisions that they already exploit when they present their plans to the European commission: unusual events, structural reforms, margins of uncertainty. There is already quite a lot of flexibility because of all the margins.

Where do the main European countries stand regarding the reform of the stability and growth pact ?

Netherlands, Germany, Austria and the Scandinavian countries are skeptical because they fear even more flexibility in the EU fiscal rules. By contrast, France, Spain and Italy like the current flexibility. We find the classic divide between western and Mediterranean countries. The Commission will start consulting about potential changes in the stability and growth pact quite soon and we will have a debate on the potential changes. It's not clear what the outcome will be.