INTERNATIONAL Monetary Fund (IMF) has called for creation of 'Central Fiscal Capacity' (CFC) in Euro Area to deploy fiscal policy, in tandem with monetary policy, for stabilizing economies during the downturns.

IMF's Fiscal Affairs Department Director, Vitor Gaspar, said: "There is ample room to simplify fiscal rules for the euro area by using a single debt anchor and a single operational (nominal) spending target".

Delivering Keynote Address at 'Fiscal Rules in Europe: Design and Enforcement' on 28th January, Mr. Gaspar explained: "An option is to use the public debt-to-GDP ratio as the anchor and an expenditure growth rule as the operational target, with a debt correction mechanism to better link the rule to the anchor".

Apart from CFC, he listed two other initiatives for Euro Area integration, its stability & growth. These are: Completion of the banking union and Integrated single European capital market.

Recounting progress achieved so far in realm of banking union, he said that this also required formulation of a European Deposit Insurance Scheme. Similarly, in the areas of capital markets, Euro area required harmonized withholding tax rules, enhanced information transparency and move to more efficient insolvency regimes.

He observed: "Progress on these reforms is essential but has been too slow. And there is no political agreement on the way forward". He also pointed out that Over time, the fiscal rules in Europe have become "more complex and opaque". The evolution process followed a long and winding road. Changes to the original setup of the fiscal framework were frequent and substantial.

According to Mr, Gaspar, "fiscal rules are necessary to offset biases in fiscal policy conducted according to day-to-day politics. The most relevant are deficit and debt biases. In most advanced economies, public debt ratios have been on an increasing path one business cycle to the next. Such half-century increases in public debt are unprecedent in peace time".

He explained that an important feature of the fiscal rules is to make sure that countries accumulate sufficient buffers in good times so as to be able provide support to the aggregate demand in bad times - through automatic stabilizers or even discretionary expansionary policy.

He added: "In other words, fiscal rules should be designed to favor counter-cyclical fiscal policies. Nevertheless, despite various amendments to strengthen the counter-cyclical features of the rules, the outcomes have been mainly pro-cyclical".