The EU fiscal framework (Stability and Growth Pact (SGP) plus the “fiscal compact”) consists of three elements: 1) the corrective arm defines “gross errors” of fiscal policies. The procedure is already described in detail in Article 126 of the Treaty on the Functioning of the European Union (TFEU); 2) the preventive arm, which describes “good” fiscal policies, i.e. a broadly balanced budget balance in normal times, depending on national circumstances, which is enshrined in secondary legislation and 3) the “fiscal compact”, which is a tighter version of 2) and is a condition for a euro area member state to be eligible to European Stability Mechanism (ESM)-funds. The fiscal compact is described in a specific intergovernmental agreement.

The whole rational of the framework boils down to the simple formula d/g (where d is the public deficit as a percentage of GDP and g is nominal GDP-growth of the country) which should be smaller than or equal to 0.6, i.e. 60 % of GDP, with a specific threshold of 3 % of GDP for d.

To implement this simple formula at the national level, there are currently some 250 pages of the rule-book (the “Vade Mecum”) in place. Some 200 European Commission full-time bureaucrats are engaged in making sure or sanctioning that national fiscal policies comply with this common rule-book. Another EU standard rule is that the EU secondary legislation has to be reviewed every five years. The next time is in 2019 at the latest.

This contribution tries to address the biggest problems of the SGP, which are in the preventive arm, and makes a proposal for a significant simplification. By using country ratings for determining the euro area Member States’ contribution to a (still to be established) Eurozone budget, incentives to have sound public finances would be improved compared to the status quo. By internalizing perceived externalities, financing can be provided to finance a (still to be defined) European public good. At the same time, fiscal policy would be less regulated below the radar-screen of the excessive deficit procedure and the hitherto political divide could be lessened.