New EU Fiscal Rules: Old Wine in New Bottles?

To understand the fiscal rules of the Maastricht Treaty, one must understand that they were crafted with the recent past in mind. The main concern during the 1970s and 1980s had been high and variable inflation, which was often accompanied by large fiscal deficits. For the policymakers at the time, there was a clear association between lax fiscal policy and inflation.
This can also be seen the landmark report of the Commission in 1991-92 titled "One Market, One Money", which provided the intellectual base for the Treaty, setting out the main economic issues, as viewed at the time. A simple textual analysis of the 200 pages of this document gives a clear indication of the dominant concerns at the time. Inflation is mentioned, 880 times. 'Deflation', by contrast, appears only twice (both in annexes). 'Stability' is mentioned 290 times, 'deficit' 190 times ('debt' over 220 times), but the word 'surplus' appears only 36 times.
The result of this preoccupation with inflation and deficits was that the Maastricht Treaty included two constraints that to this day remain at the core of EU fiscal rules: deficits should not exceed 3% of GDP, and government debt should not exceed 60% of GDP, or at least declining it should decline at a reasonable pace.
These reference values were also part of the convergence criteria that governed the entry into the Economic and Monetary Union (EMU). By 1998 Italy just about satisfied the deficit criterion and the debt level was disregarded essentially because Belgium also had a similar stock of debt.
The Stability and Growth Pact operationalized the meaning of 'reference values' for fiscal policy surveillance after the start of EMU in 1999. The Pact specified that member were supposed to aim for a balanced budget over the business cycle. The purpose was to allow countercyclical policies in recessions, when fiscal deficits could increase from zero to a maximum of 3% of GDP. In addition, the Stability Pact introduced an escape clause ("exceptional circumstances") that allowed larger deficits in case of severe downturns. To ensure compliance with these prescriptions, the Pact created an elaborate 'Excessive Deficit Procedure' with a number of stages of escalation, finally leading to fines for Member States with persistent excessive deficits.
The Pact did not survive contact with reality. (Most) Member States did not run balanced budgets during the favorable times of EMU's first years thus ran into higher deficits when the first downturn came in 2001-2002. In late 2003, the Italian Presidency rallied the three largest Member States to a proposal of the Commission that would have applied the Excessive Deficit Procedure to France and Germany. This episode showed the fundamental problem with the enforcement of fiscal rules in the euro area. Member States are always very reluctant to impose harsh measures on their peers because they might need their votes for something else in the future.
Subsequent rounds of reforms confirmed this Achilles' heel. In 2005 the Pact was made more 'intelligent' (Commission President Prodi had earlier called it 'stupid') but also became more complicated. This was not the last reform. The 2011 reform even attempted to overcome the enforcement problem with the reverse-majority voting system under which an Excessive Deficit Procedure by the Commission could be overruled by Member States having a 2/3 majority in the ECOFIN Council. However, this transferred the problem only to the Commission which then became more reluctant to propose fines.
During the spell of tranquility in the 2010s after the financial and public debt crises of 2007-2012, Member States made little progress in reducing debt levels with constant frictions with some countries, including Italy, but also Spain (Greece being a special case because under an adjustment program) regarding the implementation of budgetary plans at the limit of the acceptable under the (revised) fiscal rules. Then the limits on debts and deficits were suspended, as stipulated by EU rules, when the Covid-19 pandemic led to a severe downturn.

The Commission has now proposed new budgetary rules, that require much less adjustment than the old ones. Moreover, the basis for the new rules should be tailor-made paths for fiscal policy negotiated one by one with Member States, hoping that this will create more national ownership, solving the enforcement problem.
It is often said that generals always fight the last war. This applies also to the drafters of the original Stability Pact who did not anticipate that deflation rather than inflation could become the main problem. But, to continue the military analogy, there are some fundamental factors at play in all wars. The enduring lesson of history that was distilled in the Maastricht Treaty is that low public debt makes financial crisis much less probable and helps governments deal with all sorts of crises. The challenge for this round of discussions on new EU governance rules is put this lesson into practice.