European Union - A case for prudence while managing Imbalances: Debt-Led Economic Growth

Abstract

The paper aims to look at the EU Fiscal Framework and Governance from the viewpoints of the challenges to economic growth in a context marked by high inflation, geostrategic risks and commodities markets pressures, of the challenges stemming from the interplay between the fiscal and monetary policies when the monetary policy is constraint to tighten and of the challenges for the national authorities to deploy fiscal measures in a post-pandemic context in which the level of public debts increased substantially and constrain the fiscal space and affect the macro-financial stability. The paper takes into account the considerations and the past approaches at EU level to respond to crises with a view on the fiscal implications to achieve the financial stability, implementing legislative adjustments and working on institutional architecture development. This research takes a look at how to assess and understand the public debts sustainability and explores models and options that are possible to be taken into account by the EU leaders to strengthen the resilience of the EU fiscal framework. The paper concludes that, given the uncertainties caused by inflation, geostrategic tensions, prolonged supply chains bottlenecks, rising commodity prices and diminished fiscal space availability, all these imply expectations for further increases in new government debt instruments issuance, at a moment when the balance sheets in the financial sector (including the central banks) are already constrained by the existing debt.