We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byMonserrat Dobson
Modified about 1 year ago
© The McGraw-Hill Companies, 2012 Chapter 17: Fiscal policy and the Stability Pact I know very well that the Stability Pact is stupid, like all decisions which are rigid. Romano Prodi (EU Commission President), Le Monde, 17 October 2002
© The McGraw-Hill Companies, 2012 Fiscal policy in the monetary union In a monetary union, fiscal policy: -the only macroeconomic instrument at national level; -government borrows in slowdown and pays back on behalf of citizens; -government acts as substitute to inter-country transfers in case of asymmetric shock. Problems of fiscal policy: -effectiveness of fiscal policy depends on private expectations; -slow implementation.
© The McGraw-Hill Companies, 2012 Fiscal policy in the monetary union Crucial distinction: -automatic stabilizers: fiscal policy is spontaneously countercyclical: tax receipts decline when the economy slows down; welfare spending rises when the economy slows down; no decision, so no lag: nicely countercyclical rule of thumb: deficit worsens by 0.5% of GDP when GDP growth declines by 1%.
© The McGraw-Hill Companies, 2012 Fiscal policy in the monetary union -discretionary fiscal policy: a voluntary decision to change tax rates or spending. Because of automatic stabilizers, budget figures do not reveal what governments do with fiscal policy. Cyclically adjusted budget shows what the balance would be if the output gap is zero in a given year. Difference between actual and cyclically adjusted budget = footprint of automatic stabilisers.
© The McGraw-Hill Companies, 2012 Fiscal policy in the monetary union Actual and cyclically adjusted budgets in the Netherlands, 1972–2011:
© The McGraw-Hill Companies, 2012 Fiscal policy externalities Should fiscal policy be subjected to some form of coordination? Yes, if national fiscal policies are a source of externalities: -cyclical income spillovers via trade, strengthened by monetary union through increased trade. Income spillovers, 1970–2011:
© The McGraw-Hill Companies, 2012 Fiscal policy externalities -borrowing cost spillovers, as one country’s deficit would induce higher interest rate for everyone: weak argument since euro area integrated in world financial markets; still, capital inflows can appreciate common currency and affect competitiveness. -excessive deficits, which may lead to default: capital outflows and a weak euro; pressure on other governments and Eurosystem to help out. ‘no-bailout’ clause in Maastricht Treaty.
© The McGraw-Hill Companies, 2012 Fiscal policy externalities -deficit bias and collective discipline: build-up of debt reflects failure of democratic control over governments.
© The McGraw-Hill Companies, 2012 Principles At which level of government (regional, national, supranational) should policies be conducted? The theory of fiscal federalism deals with this question. Two arguments for sharing responsibilities: -externalities; -increasing returns to scale. Two arguments for retaining sovereignty: -heterogeneity of preferences; -information asymmetries. Theory of fiscal federalism does not provide a general answer: case- by-case approach and often we face trade-offs with no compelling answer.
© The McGraw-Hill Companies, 2012 Principles Four arguments for and against centralization at the EU level are unlikely to lead to clear-cut conclusions. Where should the burden of proof lie? The EU has taken the view that the burden of proof lies with those who argue in favour of sharing sovereign tasks: principle of subsidiarity. In other words: unless there is a strong case of increasing returns to scale or of externality, the presumption is that decisions remain at the national level.
© The McGraw-Hill Companies, 2012 Principles What does it all mean for fiscal policy in the Eurozone? In true federal states, there is a powerful federal level of government. In the Eurozone, instead, the Commission budget is far too small to play any macroeconomic role. The case for policy coordination is convincing. A step has been taken in 2011: ‘European semester’. In January of each year, the Commission presents its Annual Growth Survey, including forecasts and evaluation of member countries’ economic situation. This triggers discussions among governments and in the European Parliament. Following recommendations by the Council, every government submits to the Commission their Stability and Convergence Programmes. The Commission then assesses the national programmes and submits its conclusions and recommendations in time for the June Council.
© The McGraw-Hill Companies, 2012 The Stability and Growth Pact (SGP) Adopted in 1997, the SGP was meant to avoid excessive deficits, with fines for countries not respecting it. Enforced by ECOFIN, countries (e.g., France and Germany in 2003) avoided fines. SGP was reformulated in 2005 to avoid its rigidity. The SGP consists of four elements: 1.definition of what constitutes an ‘excessive deficit’; 2.preventive arm, designed to encourage governments to avoid excessive deficits; 3.corrective arm, which prescribes how governments should react to a breach of the deficit limit; 4.sanctions. The SGP applies to all EU countries but only the Eurozone countries are subject to the corrective arm.
© The McGraw-Hill Companies, 2012 The Stability and Growth Pact (SGP) 1.‘excessive deficit’; deficits are excessive when above 3% of GDP; countries in the monetary union commit themselves to a medium- term budgetary stance ‘close to balance or in surplus’; ‘exceptional circumstances’ when provisions are automatically suspended; 2.preventive arm: in the form of peer pressure. Finance Ministers engage in a collective discussion of one another’s fiscal policy; 3.corrective arm: ‘early warning’ and recommendations when deficit is believed to breach the limit; excessive deficit procedure for excessive deficit: recommendations, to be followed by corrective measures, and ultimately sanctions; 4.sanctions: if a country fails to take corrective action and bring its deficit below 3%, it is sanctioned. The fine starts at 0.2% of GDP and rises by 0.1% for each 1% of excess deficit. SGP does not remove fiscal policy sovereignty: governments are in full control. Also, its intent is clearly pre-emptive.
© The McGraw-Hill Companies, 2012 SGP and countercyclical fiscal policies Does the Pact impose procyclical fiscal policies?: -budgets deteriorate during economic slowdowns; -reducing the deficit in a slowdown may further deepen the slowdown; -a fine both worsens the deficit and has a procyclical effect. Solution: a budget close to balance or in surplus in normal years.
© The McGraw-Hill Companies, 2012 SGP and countercyclical fiscal policies If budget in balance in normal years, plenty of room for automatic stabilisers and some limited room left for discretion action.
© The McGraw-Hill Companies, 2012 SGP and countercyclical fiscal policies SGP is designed to provide a strong incentive for each government to bring its budget to a position of balance (or surplus) in good years. Budget balances since 1999 (% of GDP):
© The McGraw-Hill Companies, 2012 Euro Plus Pact Limits of SGP became obvious with debt crisis. A reform informally adopted in 2011: Euro Plus Pact (still to be adopted). It aims at strengthen and expand the Pact (reversing the 2005 reform). and makes no reference to the no-bailout clause: -deficit target: cyclically adjusted primary budgets must be balanced; -debt target: evolution of the debt will be one criterion used to evaluate policies (by end 2011, the debt average is close to 90% and the old target is beyond reach for many years to come); -sanctions: decision procedure much more certain and automatic. If the pact is put into place, the Commission recommendations will be automatically accepted unless a qualified majority (two-thirds of the vote) decides to the contrary; -implicit liabilities: member governments should start planning for the ageing phenomenon.
© The McGraw-Hill Companies, 2012 Ten years of the Stability and Growth Pact
© Baldwin&Wyplosz 2009 The Economics of European Integration, 3 rd Edition Chapter 18.
© Baldwin & Wyplosz 2006 The Economics of European Integration.
© Baldwin&Wyplosz The Economics of European Integration Chapter 15: Fiscal Policy and the Stability Pact.
Mar Lesson 8 By John Kennes International Monetary Economics.
The Stability and Growth Pact Frederick University 2013.
Commission’s proposals: 1) Revising Stability and Growth Pact 2) Preventing and Correcting macroeconomic imbalances Lecture 5 LIUC 2010.
European Union EMU and the Stability and Growth Pact.
The Growth and Stability Pact Michael Crumrine Scott Swisher May 24 th, 2005 – European Economic Integration A well-intentioned, misapplied fiscal rule.
Budapest 23th May 2006 Pierre-Marie ABADIE Commission Bancaire SGCB 1 The Stability and Growth Pact : Status in 2006 Budapest 23th May 2006 Pierre-Marie.
School of Business and Economics Studium Generale The euro area sovereign debt crisis: causes and consequences Prof. Dr. Olaf Sleijpen Maastricht, 3 November.
CLASS ANNOUNCEMENTS ● No class on Friday, April 23.
Final Exam 3 questions: Question 1 (20%). No choice Question 1 (20%). No choice Question 2 (40%). Answer 8 out of 10 short questions. ONLY THE FIRST 8.
European Commission assessment of the 2008 update of the Lithuanian convergence programme Ralph Wilkinson Directorate Member States II DG ECFIN, European.
Fiscal policy and sovereign debt crisis in the EU Francesco Passarelli University of Teramo and Bocconi University.
DNB/IMF Workshop October 2011 Can Eurobonds be an Effective Economic Instrument in the Euro Area? Fabian Amtenbrink (Erasmus University Rotterdam)
Forum of Federations, Ottawa, June 2010 Prof. Dr. Lars P. Feld Ruprecht-Karls-University Heidelberg ZEW Mannheim German Academy of Sciences Leopoldina.
EUROPEAN MONETARY UNION Jérôme ODDO Céline VERCHERE.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 32 Government Debt and Deficits.
1 The 6-pack: tools for a stronger Economic Governance.
Ireland’s Medium-Term Budgetary Framework John McHale Irish Fiscal Advisory Council National University of Ireland, Galway 17 April 2015 Session 7 – Independent.
The Legislative Package on Economic Governance GUE/NGL Conference Crisis & EU Governance: The Left Response Brussels, 31 March 2011 Declan COSTELLO European.
Macroeconomic Policy and Floating Exchange Rates.
Eesti Pank Bank of Estonia 15 years of currency board in Estonia Ülo Kaasik.
Fiscal Policy & Aggregate Demand A2 Economics Presentation 2005.
Professor Stefan Collignon 1 Fiscal Policy and Democracy in Europe Österreichische Nationalbank, Wien, Stefan Collignon Professor of European.
The future of euro area: do we need a fully-fledged fiscal union? Charles Wyplosz The Graduate Institute, Geneva Council for Budget Responsibility of Slovakia.
Elke Baumann Federal Ministry of Finance, Germany 39th CMTEA September 25, 2008 Iaşi A new budget rule for Germany in the light of uncertainty about medium-term.
Peter Bofinger University of Würzburg German Council of Economic Advisors.
Thoughts on developments in Euro area Ilmārs Rimšēvičs Governor of the Bank of Latvia June 8, 2010.
MACROECONOMIC POLICY In terms of short-to-medium term stabilization policy, there are two main instruments: fiscal and monetary policy In a closed economy.
Fiscal policy in EMU Prepared by/ Mohamed Sayed Abunar Asaad Tolba Abdel-Halim Supervised with/ Prof Dr. Nagwa Sama k.
Chapter 10: Fiscal Policies in Monetary Unions De Grauwe: Economics of Monetary Union.
Fiscal Sustainability in the EMU Paris, March 17 th, 2011.
Why is Germany so Important to the Continued Use of the Euro? Group 5 Sophie Lo Michael Chou Julia Brito Howard Chang.
EU economic governance: what role for European regions? “Strengthening the role of regional parliaments in EU affairs” Committee of the Regions 2 July.
ECO 120 Macroeconomics Week 7 Fiscal Policy Lecturer Dr. Rod Duncan.
C A U S E S International factors: -Increased Access to Capital at Low Interest Rates -Heavily borrow -Access to artificially cheap credit -Global finance.
Much Ado about EMU Andrew K. Rose Berkeley, Haas 1Andrew Rose, EMU.
The EMS and the Euro. EMU Adopted by the Treaty on European Union of 1992 (The Maastricht Treaty) EMU designates the zone of countries within the EU which.
1 The European sovereign debt crisis and the future of the euro Peter Bekx European Commission Reykjavik, 19 February 2013.
Macroeconomic Policies. Fiscal policy “Fiscal policy” is the government operation of government spending (G) and taxes (T). Typically we consider.
The « 6 pack » The Economic Governance Package This is the 1st time that the European Parliament has partaken in the definition of economic governance.
CHAPTERS IN ECONOMIC POLICY Part. II Unit 7 Uncertainty, Expectations and Economic Policy.
Budgetary Policy Stance Expansionary budgetary policy is designed to stimulate or expand economic activity during a downturn or recession and is usually.
EU Debt Crisis Group 1 Day3 Pavlina Rucki, Tony Chen.
© The McGraw-Hill Companies, 2012 Chapter 3: Decision making Nothing is more difficult, and therefore more precious, than to be able to decide. Napoleon.
Optimum Currency Areas. Optimum Currency Areas I 1. A theoretical construct, no country conforms to the ideal but the US with high labor and capital mobility.
Brazil What is Balance of P. C. When a country that has a large budget deficit, it has difficulty maintaining a fixed exchange rate, ultimately.
© 2017 SlidePlayer.com Inc. All rights reserved.