1. Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International Seminar for Experts The coming enlargement of the the EU Cicero Foundation October 12-13, 2006

2. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

3. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

4. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

5. Public debt in EU-27 (% of GDP), 2006 Source: European Commission, Economic Forecast, Spring 2006 Maastricht 60% criterion

6. Fiscal balance in EU-27 (% of GDP), 2006 Source: European Commission, Economic Forecast, Spring 2006 Maastricht 3% criterion

7. Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth debt/GDP ratio

8. Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth debt/GDP ratio Key message: debt accumulation the slower, the smaller the deficit higher economic growth

9. Real GDP growth (in %), 2000-05 Source: European Commission, Economic Forecast, Spring 2006

10. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) Nominal GDP growth (in %) Fiscal deficit (in % of GDP)

11. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) Nominal GDP growth (in %) 4.0%5.0%7.0%9.0% Fiscal deficit (in % of GDP)

12. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) Nominal GDP growth (in %) 4.0%5.0%7.0%9.0% Fiscal deficit (in % of GDP) 2.4%3.0%4.2%5.4%

13. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) Nominal GDP growth (in %) 4.0%5.0%7.0%9.0% Fiscal deficit (in % of GDP) 2.4%3.0%4.2%5.4%

14. Bulgaria: fiscal balance and public debt (in % of GDP) Source: National Statistical Institute (NSI) of Bulgaria; *Projected Public debt (right scale) Fiscal balance (left scale)

15. Romania: fiscal balance and public debt (in % of GDP) Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget Pubic debt (right scale) Fiscal balance (left scale)

16. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

17. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

18. Macroeconomic constraints Concerns about Inflation internal imbalances External current account external imbalances

19. Macroeconomic constraints Concerns about Inflation internal imbalances External current account external imbalances

20. External current account (in % of GDP) Current account balance = Savings – Investment Current account balance = Trade balance + …

21. External current account (in % of GDP) Saving Current account balance Investment Current account balance = Savings – Investment Current account balance = Trade balance + … Current account balance =

22. External current account (in % of GDP) Saving Current account balance Investment Current account balance = Savings – Investment Current account balance = Current account balance = Trade balance + … (Savings – Investment) of private sector + fiscal balance

23. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

24. Outline 1.Motivation – EIB interest 2.General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3.Fiscal consolidation and public investment Bulgaria Romania 4.Conclusion

25. Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05 Source: Bulgarian National Bank Change in fiscal balance Change in fiscal balance 3.8 % Decline in interest payments on public debt 2.1 % Increase in revenue 3.1 % Increase in current expenditure (excl. interest payments) – 1.6 % Decline in public investment 0.2 %

26. Romania: contributions to change in fiscal balance (in % of GDP), 2001-05 Source: IMF Change in fiscal balance Change in fiscal balance 3.3 % Decline in interest payments on public debt 3.7 % Decline in revenue 2.2 % Decline in current expenditure (excl. interest payments) 1.5 % Decline in public investment 0.3 %

27. Public investment (% of GDP) Source: AMECO (European Commission) Eurozone countries 2005

28. Conclusion Fiscal policy in BU & RO: macroeconomic stability rather than debt sustainability Public investment in BU & RO low compared to NMS-8, but increase possible without deteriorating fiscal balance Fiscal consolidation has not come at expense of public investment neutral partners

29. Fiscal consolidation and public investment: friends, foes, or neutral partners? A look at Bulgaria and Romania Armin Riess (a.riess@eib.org) European Investment Bank International Seminar for Experts The coming enlargement of the the EU Cicero Foundation October 12-13, 2006