Don’t believe the myths: EU fiscal rules need serious reboot

Eurogroup meeting today should focus on sustainability and resilience, not inflation and debt levels

BRUSSELS, 12 July 2021 – The European Union should overhaul ill-conceived and outdated fiscal rules and open the tap on investment in infrastructure, education, innovation and combating climate change, according to a new report.

– Download the report: “Fiscal Mythology Unmasked. Debunking eight tales about European public debt and fiscal rules” (27p.)

Though some politicians are alarmed at surging public debt as states battle the Covid-19 pandemic, their misplaced fears over unsustainable public debt levels put Europe’s recovery at risk, says the Finance Watch study, “Fiscal Mythology Unmasked: Debunking eight tales about European public debt and fiscal rules”.

The stark warning comes as euro area economic and finance ministers meet today in Brussels to discuss the budgetary situation of Member States.

In a damning review of EU fiscal policy-making, the Finance Watch policy researchers debunk eight harmful ‘myths’ underpinning far too many decisions by policymakers that end up hindering investment, growth, and the well-being of European citizens. They offer solutions that can speed Europe’s economic recovery and decarbonisation, whilst providing scope to address inequality and deprivation. Finance Watch recommends policymakers and opinion leaders should:

  1. Do away with the debt-to-GDP ratio (stock-to-flow), a poor indicator of debt sustainability, and switch to interest payment-to-public revenue (flow-to-flow). Historical evidence shows countries with debt-to-GDP ratios as high as 230% can manage, whilst others with ratios as low as 40% default. Therefore, assess debt sustainability by looking at variables other than arbitrary thresholds to keep watch of debt composition and mounting “sustainability-related fiscal risks”.
  2. Stop the fixation on inflation returning, driving up interest rates and rendering debt unsustainable, when research and latest economic data show no pressing risk. Inflation and interest rates hinge on structural factors unlikely to change in the near future.
  3. Dismantle the inter-generational tale that high debt levels present an unfair burden on future generations. The myth overplays the liability trope around debt while overlooking the presence of funding gaps that, if unbridged, will leave future generations worse off. Focus instead on investment that builds resilience and sustainability.
  4. Scrap the threadbare “crowding out effect” argument: As Europe finds itself awash in savings and liquidity as well as unused economic resources, more public investment can instead “crowd-in” private investment to meet societal aims like a robust economy, cleaner environment, and a well-trained workforce.
  5. Recognise that comparatively higher-debt EU countries mostly hold legacy debts from tackling unexpected previous crises, not from supposed constant reckless spending.
  6. Stop framing public budgets like household finances; running continuous public budget surpluses is often fiscally irresponsible. Focus instead on lowering future fiscal risks by investing in building a sustainable and resilient economy and on protecting public budgets better from swings in market sentiment. Rebalancing intra-EU trade would help put budgets more into balance.
  7. Throw out the outdated idea that fiscal rules set sound limits to impede politicians from overspending: whilst the chosen fiscal limits lack economic justification and suffer important conceptual flaws, debt-financing outlays are justified if done at the right moment on the right projects.
  8. Revamp fiscal rules to unleash growth and boost employment while helping Europe meet its environmental and social goals. Ensuring long-term social resilience and environmental sustainability for future generations requires moving the rules from a focus on constraining quantity of spending towards ensuring its quality.

Finance Watch Head of Research & Advocacy Thierry Philipponnat said: “European governments devise fiscal policies constrained by a self-imposed maze of economic governance rules. Those rules are built on a series of highly debatable conceptions about public debt and the role played by the state. Reliance on arbitrary indicators, such as debt-to-GDP ratio, should give way to broad debt sustainability analysis that accounts for the evolution of debt servicing cost, debt composition, maturity and ownership, as well as the building up of fiscal risks.” 

Finance Watch’s Ludovic Suttor-Sorel, the report’s author, added: “There can be no such thing as sustainable debt without a sustainable world. Whilst climate change will have a deep cost ultimately borne by public budgets, the building up of these ‘climate-related fiscal risks’ is not yet recognised as one of the greatest challenges for debt sustainability in the medium term. Revamped fiscal rules should give Member States some leeway to do the precautionary investments needed to lower these important fiscal risks.”

“Politicians need to wise-up, stop trying to apply shopkeeper economics, and shoulder the responsibilities of statecraft,” Finance Watch Secretary General Benoit Lallemand concluded: “Shed the ‘Goldilocks’ notion that pie-in-the-sky ratios will be just right for all. Look at real-world economics, and stop clinging to catchwords of a bygone era.

“Adopting appropriate levels of debt-finance spending and ensuring their quality will enable them to lay the foundations for the greener, fairer society that European citizens want and deserve.”  

– Download the report: “Fiscal Mythology Unmasked. Debunking eight tales about European public debt and fiscal rules” (27p.)

For more information, contact Benoit Lallemand, Secretary General, Finance Watch, on +32 472 73 77 86 or at

Notes to editors:

About Finance Watch: Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

EU fiscal framework background


Go to All press