The Free Exchange blog at the Economist’s website makes the point that the flip side of postulating that the Irish and Spanish governments were insufficiently countercyclical during the boom is that countercyclical deficits are symmetrically helpful during downturns. (Self-publicity disclaimer – the post cites my work with Agustin Benetrix on fiscal cyclicality). Of course, the asymmetry of credit constraints means that countercyclicality during downturns is more possible for governments that retain the trust of the sovereign debt markets. More generally, even for countries that must rely on official financing, it indicates that the speed of adjustment must be carefully designed. Indeed, as emphasised by quotes from Olli Rehn in this FT article yesterday, the EU fiscal framework recognises that flexibility is needed in the interpretation of fiscal rules.
“The stability and growth pact is not stupid,” Mr Rehn will say, according to a draft of his address seen by the FT. “Yes, the EU fiscal framework is rules-based … but at the same time, the pact entails considerable scope for judgement when it comes to its application.”