Flags of the European Union in front of the Berlaymont in Brussels ©Fotosearch.de

Monthly Report: European debt needs to be visible at the national level

Mounting borrowing at the European level could end up leaving national fiscal indicators less informative in the future, the Bundesbank warns in the current issue of its Monthly Report. “Existing national indicators (such as the Maastricht deficit or Maastricht debt) do not capture European debt and deficits, meaning they may no longer be fit for purpose in the future. This presents a number of risks, one being that the resulting burdens might go unnoticed,” the Bank’s experts argue. This, they reason, is why complete statistical reporting also needs to be ensured at the European level.

EU deficits weigh on Member States

The analysis came in response to plans to significantly ramp up borrowing at the European level to combat the coronavirus pandemic, and also because the assistance for Member States will comprise not just loans but grants as well. This will leave the EU budget with a notable deficit for the first time in its existence. “Deficits at the European level create a definite – rather than just a potential – future burden for Member States,” the Bank’s experts stress, which is why it is particularly important to take them into account when interpreting national indicators.

The economists use an illustrative example to illuminate this issue. Assuming the EU borrows 10% of EU gross domestic product (GDP) and uses these funds to pay out equally sized grants to Member States over four years, the national deficits during this period would be lower each year by 2½% of their GDP. Focusing on the national indicators alone makes the situation seem more favourable than it actually is. “While this might improve the national fiscal indicators, the national finances will not be any better overall,” the Bank’s economists explain. After all, they reason, European debt will need to be serviced by taxpayers in the Member States at some point in the future on top of the national debt burden.

If European deficits and debt are left out of the equation, there is a risk that the existing fiscal rules, which target the national indicators, might become ineffective. The Bundesbank’s experts also warn that if the situation is left unchanged, there could be a greater incentive to generally increase borrowing and merely shift it from the national to the European level.

Comprehensive reporting requirement needed at the European level

All these reasons are behind the Bundesbank’s push for greater transparency by making comprehensive reporting at the European level mandatory. “Economic and fiscal policy analysis can only deliver meaningful insights if the underlying national and European statistics are compiled in a complete, reliable and transparent manner,” the Bank writes in the Monthly Report, noting that this applies in particular to the Maastricht deficit and Maastricht debt. This is not currently the case. The Bank stresses furthermore that the data at the European level should be made available in a timely manner, as this would allow European deficits and debt to be allocated to Member States for the purposes of economic and fiscal policy analysis, amongst other things.