Independent fiscal councils: neglected siblings of independent central banks? An EU perspective

Abstract:

Governance of monetary and fiscal policy have followed diverging paths. Since the late 1980s monetary policy has been delegated to independent central banks. By contrast, fiscal stabilization remained in political hands but has progressively been constrained by rules; the Stability and Growth Pact in the EU is a prominent case in point. While delegation and independence eliminated the inflation bias, fiscal policy still suffers from a deficit bias as enforcement of rules remains difficult.

A logical extension of all attempts to progressively tie the hands of politics would be to carve out the stabilization function from the broader field of fiscal policy and to delegate it to national independent fiscal councils. Apart from addressing the political economy behind the deficit bias, such a step would facilitate a better co‐ordination of macroeconomic policies in Economic and Monetary Union.