Fiscal discipline and flexibility in EMU: the implementation of the Stability and Growth Pact

Fiscal discipline to safeguard the credibility of the singlemonetary authority and fiscal flexibility to respond to country-specificshocks are two core principles governing budgetary policy inEMU. The Stability and Growth Pact aims at ensuring the firstobjective. To comply with the requirements of the pact, EU membersneed to achieve a 'close to balance or surplus' position andchange their budgetary behaviour in periods of cyclical upturnsby refraining from spending the 'growth dividend'. Past experienceshows that fiscal laxity does not buy more effective stabilization.Once EMU countries have achieved their medium-term target, theirautomatic stabilizers will be able to operate fully, thus helpingin smoothing out cyclical fluctuations. The main potential problemsin the implementation of the pact may arise in the early yearsof EMU, during the transition to a balanced budget, in the eventof a slow-down in economic activity.     

Replacing the Stability and Growth Pact?

The euro-zone division between a single, federal monetary system and separate national fiscal systems is troublesome. The attempt to deal with it via the Stability and Growth Pact has not succeeded. Any hopes that the function of stabilizing asymmetric shocks might be shifted to the federal centre have been dashed by the referendums. I argue that the main concern over the event of a failure of a nation state in the euro-area to meet its debts is the contagious effect that that would currently have on its domestic financial intermediaries. So the proper response would be to enforce significant incremental capital requirements on financial institutions' holdings of such debt.Financial Market Group London School of Economics—United Kingdom. Presidential Address at the Sixty-First International Atlantic Economic Conference, March 15–19, 2006 Berlin, Germany. Presidential Address at the Sixty-First International Atlantic Economic Conference, March 15–19, 2006 Berlin, Germany. My thanks are due to Peter Kenen, Jacques Melitz, Warren Mosler, Waltraud Schelke and Randy Wray and to the editors of this journal fortheir most helpful suggestions, corrections, and advice. All remaining errors are my own.     

《稳定增长公约》的原则还能继续吗?--对欧盟执委会与理事会之间诉讼案的思考

2004年7月13日,欧洲法院就6个月前欧盟执委会起诉欧盟理事会的一场官司做出裁决。这一裁决引起欧元区国家政府和欧盟各大机构的普遍关注。各国政界和学术界也对此案件引发的问题进行了热烈的讨论。欧盟五大机构中最重要的两个机构之间互讼官司本来也并非没有前例,但以往的案子均未涉及重大原则问题。这次诉讼案关系到欧元区稳定运行的基础《稳定与增长公约》的原则是否能够继续坚持的问题。欧洲法院的裁决提出一个重大问题:如何实现欧元区各国经济的协调发展?一、大国财政赤字超标引发的《稳定与增长公约》危机欧元区各成员国的经济周期存在…     

Stability and Growth Pact: issues and lessons from political economy

The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate.Non-technical summary The EU fiscal framework as laid down in the Maastricht Treaty and the Stability and Growth Pact (SGP, the Pact) aims to preserve fiscal sustainability while allowing room for automatic fiscal stabilisation. These two objectives are also at the heart of the ECB’s interest in the EU fiscal framework because their attainment facilitates monetary policy making in the short and long run.The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. The literature review of the first part reveals that fiscal rules can help solve deficit/debt biases and time inconsistency problems by constraining the behavior of policy makers. But rules can also mitigate biases if they facilitate financial market and public scrutiny of fiscal policies.Thereafter, the paper analyses the institutional environment in which EU fiscal rules are applied. It argues that EU rules reflect a “contract” amongst countries that retain sovereignty on fiscal policies. Enforcement, therefore, ultimately has to be undertaken by the contracting parties. Due to this constraint, the rules can also be characterised as “soft” law (with the 3% limit being nevertheless a much “harder” constraint than the other elements). But this does not necessarily imply that the rules are ineffective (or “dead”). Soft law reduces political transaction costs (by improving transparency and providing a forum for peer pressure). Moreover, if well-designed, such law can boost incentives towards making the rules “self-enforcing”. Evidence speaks in favour of this view: while EU fiscal rules were bent in a number of cases and compliance is undeniably of concern, major and rapid fiscal balance deteriorations have been largely prevented since the start of EMU.The paper also looks at potential trade-offs between “complex” rules where a “fine-tuned” economic rationale may boost acceptance of the rules versus simple and clear rules that allow easy monitoring. It is argued that clarity and simplicity of rules are important especially when formal enforcement is limited (“soft law”) and public monitoring becomes more important. By facilitating public and market monitoring of compliance, clear and simple rules are also more costly to breach.The benefits of “complexity”, and in particular the use of administrative discretion to fine tune the rules to country situations have limits, in particular when it comes to the excessive deficit procedure (EDP). It is argued that the 3% deficit limit and the time frame for correcting excessive deficits already provide some room to accommodate economic circumstances. The 3% limit must be clear, simple and strictly implemented to anchor expectations of fiscal discipline and to facilitate public and market monitoring. Further discretion and relaxation would conflict with this need. From this angle, other risks (e.g., efforts not materializing, structural reforms producing surprise costs etc) are hard to justify as a reason for extending deadlines to correct excessive deficits.The preventive arm of the Pact with its requirement of close-to-balance-or-in-surplus budgetary positions defines sound medium term budget positions and adjustment paths. This may be appropriately fine-tuned to address concerns about the Pact’s underlying economic rationale. For example, a symmetric application in good and bad times and less time inconsistency would be desirable.Finally, the timing of a debate on fiscal rules needs to be carefully chosen. In the EU context (and perhaps in other contexts as well), there seems to be much inherent pressure to make the rules more “complex”. Moreover, for the debate initiated in summer 2004, there was also no willingness by countries to give up sovereignty nor was there a sense of urgency to strengthen public finances via tighter rule implementation and enforcement. In such an environment, it is likely that changes to fiscal rules make them more complicated, discretionary and, thereby, potentially less enforceable.The views expressed are those of the author and not of the ECB. Comments by Vitor Gaspar, Mark Hallerberg, Steven Keuning, Jose Marin, Richard Morris, Gilles Noblet, Hedwig Ongena, Luca Onorante, Rolf Strauch, Juergen von Hagen, an anonymous referee and valuable assistance by Anna Foden are much appreciated.     

《稳定与增长公约》与法德财政赤字超标--兼论欧元区财政纪律的取向

在欧元正式进入流通领域以后,欧元区两个最主要的经济体——法国和德国实施的财政政策先后违反《稳定与增长公约》(以下简称《公约》)的规定,而《公约》一向被视为保障欧元稳定运行的重要基石之一。依据该公约,应对违反规定的国家实行相应的制裁以保证公约的有效性、权威性。但是,在经过激烈地争论后,欧盟财长委员会作出裁决:目前暂时不对法德两国实施经济制裁,并允许两国在2005年以前将财政赤字占GDP的比率恢复到公约规定的范围之内。这一裁决意味着,《公约》关于财政纪律的规定并不是不可动摇的,公约的权威性受到质疑,因此在欧盟内部引起很大争议。以欧洲中央银行为代表的公约权威维护派(如欧洲央行前行长杜伊森·贝赫和现任欧盟     

Revisiting EMU's Stability Pact: A Pragmatic Way Forward

The Stability and Growth Pact is under fire. Some countriesare meeting major problems in sticking to the rules. Proposalsto reform the Pact or ditch it altogether abound. The allegedweaknesses of the Pact tend to reflect trade-offs typical ofsupra-national arrangements. This aspect has to be factoredin when considering reforms of the current fiscal rules: thereis no miracle solution. EMU without rules would be an interestingexperiment, but a risky policy option. Given the existing degreeof political integration in EMU, internal adjustment ratherthan attempting to redesign the rules from scratch appears amore suitable way forward. Redefining the medium-term budgetarytarget, improving transparency, tackling the pro-cyclical fiscalbias in good times, moving towards non-partisan applicationof the rules, and improving transparency in the data can achieveboth stronger discipline and higher flexibility.     

EMU Stability: Direct and Indirect Risk Sharing

Our paper aims to analyze the effectiveness of different risk-sharing mechanisms in providing stability to a monetary union. We select two stylized tools with extreme and opposite features. The first is an expansionary but conventional monetary policy that is used to help EMU’s most fragile member states manage their public debts; the second is a centralized fiscal policy that allows for the transfer of a portion of these public debts from EMU’s most fragile member states to those considered EMU’s “core”. By a stylized periphery-core model of a monetary union, we compare the strengths and weaknesses of these two tools in order to reach some welfare implications in terms of union stability.     

Stable and enforceable: a new fiscal framework for the Euro area

Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from being undermined by undisciplined governments, there is a need for a framework capable of imposing fiscal discipline. This paper considers an intertemporal assignment, where fiscal policy focuses on long-term objectives and monetary policy on short-term stabilisation. We argue for public sector debt targets as a practical way to achieve such a set up, and an excess debt protocol is constructed to give enforceable form to those targets. The ideas of “fiscal space” and optimal debt levels are used to provide a mechanism for identifying a stable region within which the debt targeting regime should operate. Making these factors explicit would both improve the credibility of planned fiscal policies and reduce risk premia on borrowing costs. We finally show how Europe’s competitiveness pact, and debt restructuring operations, can be used to maximise the available fiscal space.     

A framework for intergovernmental fiscal relations in South Africa

South Africa is in the process of developing a new governmental structure. In this paper the principles governing intergovernmental fiscal relations are examined. The main types of government and the conditions for an efficient decentralized structure, as well as the assignment of expenditure functions and tax bases to the various levels of government, are discussed. The inevitable imbalance between expenditure and revenue requirements at subnational level and possible remedies are noted. General guidelines for the design of intergovernmental fiscal relations in a revised governmental structure are presented in conclusion.     

Japanese fiscal reform: fiscal reconstruction and fiscal policy

This paper evaluates the recent movement of Japanese fiscal reform. We first summarize fiscal policy in 1990s. Then, we investigate several relevant topics of fiscal policy such as the macroeconomic impact of government debt and the sustainability problem. We then consider dynamic properties of fiscal reconstruction process by analyzing the dynamic game among various interest groups. This paper points out that the long-run structural reform is more important than the short-run Keynesian policy in Japan.     

Growth and employment effects of fiscal regimes

This paper presents an endogenous growth model with firms exhibitingexternal or internal increasing returns. Firms are either perfectlyor monopolistically competitive. The paper extends fiscal policyresults, to cases where innovations are intentionally generatedby firms. To provide quantitative information, the model iscalibrated to replicate EU7 aggregate data. The theoreticalresults indicate that distortionary taxes have strong negativeeffects on growth and employment and they tend to increase withthe degree of private returns. However, the quantitative resultsturn out to be fairly robust with respect to alternative assumptionson the degree of internal increasing returns made in the processof calibrating the model.     

EMU, Monetary Policy Interactions and Exchange Rate Stability

EMU leads to the elimination of monetary policy coordination failures within the euro area. Whether this translates into more transatlantic exchange rate stability depends on the origin of economic shocks. Martin's (1997) conclusion that EMU will lead to more stable exchange rates is shown to hold for both symmetric and asymmetric shocks in Europe, but not for shocks that originate outside Europe. The results remain valid when taking into account that the pre-EMU era was characterised by a Bundesbank-led ERM, rather than a free float. Finally, the results are checked for a future expansion of the euro area.     

Financial Stability,Monetary Stability and Growth: a PVAR Analysis

Open Economies Review - This paper employs a panel vector autoregressive (PVAR) model to investigate the relationship among financial stress, inflation and growth in 19 advanced economies over the...     

The assessment: macroeconomic policy after EMU

In this paper we discuss the emergence of the new European macroeconomicstructure within EMU. We focus on three important elements:the wage-fixing authorities in each country, the fiscal authoritiesin each country, and the single European Central Bank (ECB).We identify serious problems which might arise in coordinatingboth the wage-setters and the fiscal authorities, and arguethat these problems could be exacerbated if the ECB conductsmonetary policy inappropriately. In the light of this we providerecommendations for the conduct of monetary policy by the ECB.The paper also briefly discusses financial stability issuesand the interaction between the countries in EMU and the restof the world.     

The Demand for Money for EMU: a Flexible Functional Form Approach

Monetary aggregates have a special role under the “two pillar strategy” of the ECB. Hence, a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the eleven EMU (EMU-11) countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate, in accordance with Barnett (J Econ 136(2):457–482, 2007). The multilateral Divisia monetary aggregate for the EMU-11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU-11 within the framework of a representative consumer’s utility function, using Barnett’s (J Bus Econ Stat 1:7–23, 1983) locally flexible functional form, the minflex Laurent indirect utility function. The analysis of elasticities with respect to the asset’s user-cost prices shows that: (i) transaction balances and deposits with agreed maturity are income elastic and (ii) the monetary assets are not good substitutes for each other within the EMU-11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB provides Divisia monetary aggregates to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City.     

The canadian fiscal problem: The macroeconomic connection

Canada's public sector debt has increased from 5 percent of GDP in 1974 to 64 percent in 1994 on national accounts. The paper provides a summary assessment of the relative contributions of changes in taxation, program spending, interest rates, and economic growth and fluctuations to this explosion of public debt. By far the most important source of debt accumulation has been the anti-inflationary recessions of 1982 and 1990. Higher world interest rates and slower trend productivity growth have been significant, but secondary contributing factors. Lax spending has definitely not been a net source of debt over the period.     

The Forex Regime and EMU Expansion

This paper provides evidence that the choice of the foreign exchange regime is not of first order importance for achieving high output growth. It is argued that due to the forward looking nature of the foreign exchange market, exchange rate stability hinges on the current and anticipated coherency of monetary and fiscal policies. We demonstrate this empirically on a panel including potential EMU accession countries. By means of rank regression analysis we uncover the partial links across the regime specifics of the representative country versus the German regime during the 1990s.