This paper studies the implications for the European Central Bank (ECB) of the new EU fiscal framework, focusing on five aspects where monetary and fiscal policies intersect: (1) fiscal dominance over monetary policy; (2) fiscal drag created by the new framework; (3) moral hazard created by very low interest rates; (4) the effectiveness of the ECB’s Transmission Protection Instrument (TPI), and (5) the impact of the new framework on green public investment. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 4 December 2024.
Authors
- Pages
- 35
- Published in
- Belgium
Table of Contents
- LIST OF ABBREVIATIONS 6
- List of figures 7
- List of tables 7
- EXECUTIVE SUMMARY 8
- 1. Introduction 9
- 2. Main features of the new Fiscal framework 10
- Figure 1: Required fiscal adjustment based on reference paths and fiscal adjustment proposed in MTPs 13
- B) After correcting for differences between 2024 SPB projected by the reference path and the MTPs 13
- A) Without correcting for differences between 2024 SPB projected by the reference path and the MTPs 13
- 3. Implications for Monetary Policy 14
- 3.1. Fiscal dominance 14
- 3.1.1. Characterisation and evidence 14
- Figure 2: ECB policy rate and public debt ratios, selected countries 15
- Figure 3: Euro area long-term inflation expectations and public debt ratios, selected countries 16
- 3.1.2. What might change under the new framework? 17
- 3.2. Fiscal stance 17
- 3.2.1. Characterisation and evidence 17
- 3.2.2. What might change under the new framework? 17
- 3.3. Moral hazard 20
- 3.3.1. Characterisation and evidence 20
- Figure 4: Government interest payments and primary balances Unit: % of GDP 22
- Figure 5: EU fiscal rule numerical compliance index, 1998-2023 23
- Figure 6: 10-year government bond yield spreads to Germany, in % 24
- 3.3.2. What might change under the new framework? 25
- 3.4. The effectiveness of the TPI 25
- 3.4.1. Characterisation and evidence 25
- 3.4.2. What might change under the new framework? 27
- 3.5. Low (green) investment spending 27
- 3.5.1. Characterisation and evidence 27
- 3.5.2. What might change under the new EU fiscal framework? 28
- 4. Conclusion 30
- REFERENCES 31
- ANNEX 34
- The Larch et al (2023) index of compliance with the fiscal rules 34
