Fiscal Framework in Europe: Implications for Austria

Friday, June 3

Hans Jörg Schelling, Minister of Finance of the Republic of Austria

Europe is a success story and the euro a stable and successful currency. Nevertheless, more needs to be done to deepen cooperation between member states and make the current fiscal framework more transparent, simple, and predictable if the EU is to ensure joint fiscal discipline and economic prosperity.

Click here to view the full version of the presentation.

The JVI Annual Lecture is intended to stimulate economic policy discussions at the highest level. This year, Dr. Hans Jörg Schelling, Austria’s Finance Minister, reviewed the current fiscal situation in Europe as seen from Austria.

In his introduction, JVI Director Norbert Funke thanked Minister Schelling for his ministry’s long-standing support of the JVI, which has been instrumental in building capacity in the region. The challenges of recent years have forced important changes in European institutions (e.g., European Stability Mechanism) and the fiscal framework, including the 2011 Six Pack, the 2012 Fiscal Compact, and the 2013 Two Pack. Mr. Funke’s introduction provided context to Minister Schelling’s main thesis that although the various reforms significantly improved the fiscal policy framework in the EU, they also heightened complexity and opened up space for more discretion. Further reforms are needed.

Minister Schelling began with a critical assessment of the two pillars upon which the European fiscal framework rests. The first pillar – based on the stability and growth pact and subsequent adjustments – consists of rules for balancing the budget and managing public debt, enforced by a range of political and financial sanctions should a country not comply with them. The rules have been made more flexible to better fine-tune fiscal policy to the economic cycle, but Minister Schelling identified several problems: (1) The current compliance rules are complex and difficult to predict; (2) “excessive deficit” countries have a very different adjustment path and are treated more leniently than countries in the “preventive arm;” and (3) there is a tighter focus on structural deficits at the expense of debt sustainability even though the average debt-to-GDP ratio peaked at 94 percent in 2014. To overcome these problems, Minister Schelling suggested designing rules that do not penalize (unbiased) forecast errors and reinforcing the expenditure pillar to better control the debt ratio.

The second pillar – subject to much debate though relatively less developed – deals more broadly with coordination of economic policy throughout the EU. Some member states argued that in a rules-based system, the proper fiscal stance would emerge automatically. Indeed, “putting all houses in order is the first responsibility of policymakers,” Minister Schelling noted. Moreover, the June 2015 Five Presidents’ Report called for a common macroeconomic stabilization function (possibly with a common unemployment insurance system) to deal with shocks that cannot be managed at the national level alone. The design of the stabilization function should not lead to permanent transfers between countries, or undermine the incentives for sound fiscal policy, Minister Schelling warned. Without a sufficient degree of harmonization and economic convergence, he explained, it may be difficult to avoid moral hazard.

Another issue being debated is the proposal for adopting a “golden rule” for public investment in Europe (i.e., exempting net public investment from the structural deficit). Not only do exemptions lead to a lack of discipline and misallocation of resources, Minister Schelling noted, they may also jeopardize debt sustainability. Instead, he called for building up democratic accountability in the EU so that additional rules applied to national budgets do not interfere with the sovereignty of parliaments to make autonomous unbiased decisions. Achieving a medium-term objective is not the end of the road for a finance minister. In the case of Austria, for instance, the current challenges for fiscal policy include: (1) lowering the tax burden to stimulate private sector activity; (2) crafting strategies for dynamic expenditure items in the budget (pensions, health care, elderly care); and (3) prioritizing expenditures in a globalized economy.

Minister Schelling ended with some interesting statistics and high-level considerations. Europe’s share of worldwide population has been on a downward trend; it is now just 7 percent. Its share of world GDP has been following a similar trend, having fallen to some 25 percent. At the same time, Europe accounts for an increasing proportion of global social security spending, which has already reached 50 percent, underlining the need for reform.

A lively discussion followed the lecture. For instance, the audience sought Minister Schelling’s views on: (1) what would be an appropriate degree of flexibility for fiscal policy rules; (2) the role of investment spending in fostering higher growth in Austria; and (3) recent reforms to avoid future excesses by banks and to break the bank-sovereign loop in Europe. On the first question, he replied that it may be preferable to allow some temporary flexibility in exceptional cases of unexpected events (e.g., multiyear expenses related to the integration of refugees), but that making the standard Maastricht rule permanently more flexible should be avoided. On the second question, Minister Schelling noted that while Austria has a relatively high public investment ratio (3 percent of GDP), it also has a relatively high stock of public debt, and questions remain about which investments are the most effective to boost economic growth. He mentioned recent initiatives in this area, from Industrie 4.0 to housing investment programs and labor market reforms. On the third question, Minister Schelling emphasized that Austria has been quick to transpose into national legislation the major EU initiatives addressing bank-sovereign loops (e.g., Bank Recovery and Resolution Directive, Banking Union) and has drawn numerous lessons from its own “crisis of profitability” in the banking sector.

Irina Bunda, Economist, JVI

Share this page

© 2021 Joint Vienna Institute, Mariahilferstrasse 97, A-1060 Vienna, Austria, Tel: +43 1 798-9495, Email: