Integration of the Baltic States into the EU and Institutions of Fiscal Convergence

This study applies Taylor's (2000) proposed fiscal rule to EU-15 countries. We show that such a simple, flexible and transparent fiscal rule, if applied to individual EMU countries, could improve the enforceability of the Stability and Growth Pact. This rule is used to compute the structural budget balance consistent with a total budget position in balance, given national specificities concerning automatic stabilisers and the output gap. It is thus designed for being consistent with both fiscal discipline and flexibility.

The fiscal policy framework in the European Union was originally agreed upon in the Maastricht Treaty 30 years ago. In the following years it has been supplemented (Stability and Growth Pact) and modified, influenced by the experience of its application practice and external shocks, such as the financial crisis. However, the essence of this framework remained the same - member states are obliged to conduct a disciplined fiscal policy, which, in a nutshell, is assessed by comparing the ratio of budget deficit and public debt to GDP in a given country to the reference values. Even before the outbreak of the Covid-19 pandemic, the need to change the mechanisms for disciplining fiscal policy was widely recognized. High and persistent levels of public debt, pro-cyclicality of fiscal policy, shortage of public investment and the complexity of fiscal rules and their weak enforceability are indicated as unfavorable features of public finance. In 2019 the COVID-19 pandemic came as the biggest shock to the world community since World War II. In the context of the provisions on fiscal discipline, in May 2020 the Commission and the Council activated the general escape clause of Stability and Growth Pact, for the first time ever. This has allowed member states to take the necessary fiscal measures to deal with the crisis. On 19 October 2021, the European Commission adopted a Communication relaunching the public consultation, put on hold in March 2020, on the EU?s economic governance framework. The new governance framework should be tailored to the challenges the EU is facing, including the challenge of achieving a fiscal stance that is appropriate for the euro area as a whole. There is a fairly widespread belief in the need to move away from rigid reference values, which should be replaced by solutions that ensure the sustainability of public debt in the differing circumstances of member states. The proposed options for the revision of the EU fiscal framework, although justified in theory, have a fundamental flaw - they strengthen the position of supranational institutions and, moreover, open the door to discretion and potentially unequal treatment of member states. These proposals can be seen in a broader context - the federalization of the EU, which would limit the sovereignty of nation states.

The Third Phase of the European Economic and Monetary Union and the consequent implementation of the Unique Monetary Policy, advised EU countries to coordinate their fiscal policies, because of the relations between monetary and fiscal policies. The application of the Stability Pact has reduced the discretional nature of national fiscal policy, creating arguments against it, especially in a period with low growth rates. This, without a doubt, will have political consequences in the European integration process. In economic terms, perhaps it is necessary that a deeper fiscal policy could let European systems of social protection act as automatic stabilisers. On the other hand, the stability limits the growth of the public expenses in these countries. The objective of the article is to analyse the different arguments on the effects of the Stability and Growth Pact, taking into account the EU enlargement process.

The recent economic-policy debate in the EU has largely focused on fiscal policy and the Stability and Growth Pact. The reason is the current budgetary problems of some member states. Portugal breached the three-per cent-of-GDP deficit ceiling in 2001 and 2002. Germany breached it in 2002, and may also do so in 2003. France and Italy have abandoned their commitments to earlier agreed budget objectives and there is a clear threat that they may violate the deficit ceiling, too. These events have contributed to a revival of the debate on the fiscal policy framework in the EU. The European Commission has recently proposed a number of changes in the Stability and Growth Pact (European Commission 2002b). There have also been calls for more fundamental revisions of the EU fiscal policy framework including proposals to scrap the Stability and Growth Pact altogether (see, for example, Financial Times 2002a, b, c; The Economist 2002; De Grauwe 2002; or Walton 2002).

In European Monetary Union (EMU) with its decentralized fiscal policies there is a strong bias towards large chronic budget deficits. Having a common currency implies that a member country running high fiscal deficits does not have to bear the full cost of doing so. In particular, high deficits in an individual member country are unlikely to cause a rise in that country’s interest rates. If interest rates rise, they rise in the whole currency area. Thus each individual member state can shift part of the cost of its own fiscal profligacy on to other member countries. However, large chronic budget deficits and the ensuing rising debt-to-GDP ratios are harmful. They crowd out private investment and thus lower long-term economic growth. Furthermore, sooner or later they may induce governments to put pressure on the European Central Bank (ECB) to permit higher inflation in order to erode the real value of the debt. These adverse effects of national fiscal policies make it necessary to effectively limit budgetary deficits of EMU member states. They are the fundamental justification for the Stability and Growth Pact (‘Stability Pact’ for short).

The Case for Spending Rules

Recent events have highlighted the potential importance of nonlinear efiects of flscal variables (notably debt and deflcits) on interest rates: While in times when government solvency is not a concern the standard crowding-out efiects are of moderate magnitude, in times when default risk becomes an issue the interest rate efiects can become very large. This paper provides new evidence on the magnitude of these efiects. For the case when default risk is not a concern, it uses an arbitrage-free term structure model to estimate the dynamic efiects of flscal policy shocks on interest rates along the entire maturity spectrum. For the case when default risk becomes a concern (thereby violating a central assumption of the term structure model), I present evidence based on EMU government bond spread regressions on time-varying efiects of national flscal policies on spreads as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of flscal policy. JEL classiflcation: E6, H6.

Comment

Egypt has been exposed to two recent shocks: the global financial crisis of 2008 and the COVID-19 Pandemic of 2020. Though the origin and the implications of the two shocks are quite different, they bear some similarities in terms of the sharp decline in global economic growth and negative implication on the Egyptian economy. The present study attempts to assess the cyclicality of monetary policy in Egypt during the two crises. To this end, both descriptive and econometric techniques are employed in this study to reveal the cyclicality of monetary policy. On the descriptive side, the correlation between the cyclical component of policy rate and that of real GDP is calculated. Moreover, both an ARDL and NARDL approach are estimated to derive the augmented Taylor rule for the cyclical component of policy rate. Two dummy variables reflecting the two crises along with their interaction with output gap are incorporated in the model to disentangle the impact of the two crises upon monetary policy cyclicality. The study concludes that monetary policy in Egypt is more acyclical and that its response to changes in output gap is statistically insignificant, during both normal times and crisis time.

This paper reviews the arguments for and against the “Stability and Growth Pact.” We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be used to yield opposite and plausible conclusions. Empirical evidence in favor of a Pact‐like rule is also scant. We therefore suggest the view that the Stability Pact is a public social norm, that countries obey in order to preserve reputation among the other members of the European Union. Using this extreme—but not implausible—hypothesis, we build a simple model similar in spirit toAkerlof's (1980)seminal work on social norms, and we show that reputation issues may cause the emergence of a stable but inferior equilibrium. Increased heterogenity generally has the effect of further reducing aggregate welfare; we conclude that the problems posed by the Pact/social norm are likely to increase following the enlargement, when a number of countries anxious to prove their “soundness” joined the club.

The automatic stabilization issue has been permanently at the forefront of the scene, since Robert Solow invited the academic community to reconsider it in 2002. Looking at the criticisms raised against fiscal activism, rule-based fiscal policy relying on the working of automatic stabilizers provides several clear advantages. State-contingent tax revenues and expenditures dampen economic fluctuations practically with no information and implementation lags. Moreover, the impact lag of automatic stabilizers is generally considered to be relatively short. In principle, if automatic stabilizers are allowed to operate symmetrically over the cycle, they do not contribute to structural deterioration in budgetary positions.

Abstract: The article analyses potential consequences of Brexit as well as the current costs and benefits of UK’s membership in the EU, furthermore focusing on alternative agreements that may result between the members. Keywords: financial and economic integration, economical and political institutions, European Union. In 2013, David Cameron, British prime minister deliv-ered a speech on Britain and Europe. He offered the British public a referendum concerning the United Kingdom being part of the European Union [1; 4]. The “Brexit” is a very structural reform that will have a substantial impact both for the UK and the EU.The UK is one of the largest mem -bers with big contributions both in economical and political spheres of the EU.Both countries will come across the challenge of manag-ing the process of separation. Despite the fact, that there is an article that informs the process of the separation included in the Treaty of the European Union, there has been no practical experience since the EU emerged [1; 6].Secondly, it may change the ongoing cooperation of the European Union after the loss of one of its most influential states [2; 12].Last but not least, it is hard to predict the relationships of the UK and the EU after the withdrawal [3, 44].The essay is structured in the following way: first section explains what happens in the UK and its “value” for the EU. It is crucial to understand the implications of the separation to in order to have a full understanding of the situation in Europe. Hence, the first section will explain why the UK may benefit without being a member state of the EU. To keep the chronology, the second section concentrates on the procedural actions towards the withdrawal and institutional changes necessary for the separation. It will take a look on the core economical and political institutions of the EU and analyse their changes after the UK withdrawal. Third sec-tion will be focused on the post-withdrawal operations of the EU and relationships between United Kingdom and the European Union.David Cameron has announced committing a future Con-servative government to renegotiating Brittan’s relationship with the EU, to then be put to a referendum, widely expected to be around 2017 [1; 7].The Euro crisis made a crucial impact on the British pub -lics’ faith in the European Union. Stepping forward further in-tegration is not something the Britons are comfortable with. The past experience of Portugal, Italy, Greece and Spain made both the UK government and the UK citizens to understand that it will be harmful to use EURO as a currency. Therefore, we can see that the efficiency of Single Currency Area The-ory is not applicable for the United Kingdom at the current stage of development of the Euro Zone [4].The UK will also be benefiting from less migration, no EU budget payments, better opportunities with emerging markets and less regulation from the EU [2; 14]. The last argument explains the actions of Cameron towards “Brexit”. The big controversies between the UK and the union appeared dur-ing the EU summit in December 2011 [5]. David Cameron put a veto on the EU fiscal treaty 2011 for two reasons. Firstly, the UK did not want further European Integration; secondly, the following changes in Growth and Stability Pact may lead to economic downturn of the UK [6].In the Article 3 of Fiscal Compact there were made some changes in Stability and Growth Pact. The main idea of the pact is that the ratio of the general government debt to gross domestic product should be significantly below 60% in order to keep the risks of default relatively low and the structural deficit should not accumulate more than 0.5 % of nominal GDP [7]. The new fiscal treaty contained the in-formation about stricter sanctions for the countries that ac -cumulate higher level of debt. A country can be funded up to 0.1 % of GDP [6].The change of pact helps Europe to minimize the risk of a default of its member states because it does not allow the country to get heavily indebted. The changes in the fiscal treaty are made to prevent a country such as Greece getting heavily indebted [6].It is possible to look on this situation through the prism of Fiscal Fatigue theory.

(A Study on Japanese Fiscal Sustainability and Fiscal Discipline)

This paper addresses the probable modifications of the economic strategy of Lithuania after the 2008-2009 crisis (the Great Recession) and the changes in macroeconomic environment in the European Union (EU). In Lithuania’s case, like that of the other two Baltic states, a certain specificity of a small open economy was revealed and the need for some adjustment of strategy was displayed. Both the rapid economic progress of the Baltic States as well as their extreme economic depression during the crisis in the largest part was the result of the integration of those national economies into the European and world markets. The crisis has not only halted the economic progress of the EU and other countries of the world for a few years, not only induced attempts to review some weakened postulates of economic theory, but also asked for major adjustments in the economic policy of the EU and member states. Based on the texts drafted by the European Commission it has already agreed on tougher requirements in the Stability and Growth Pact, signed and ratified the Treaty on stability, coordination and governance in the economic and monetary union, and the European semester began operating procedures. EU Member States’ economic policies have become inserted into a rigid frame, and the process of content aggregation of national economic policies will continue. Based on theoretical conclusions of single currency area and the practical requirements of the common monetary policy in the euro area integration processes are underway and will proceed rather fast. By the decisions of European Council the euro area should become a nucleus of economic integration of the EU member states, leading to full economic union. EU’s political leaders, in conformity with the theory of European integration, raise already an issue of political union into the agenda. The article provides an analysis of the changes and draws a couple of conclusions. First, the process of economic integration should be separated stricter than ever before from process of political integration. Second, economic integration modifies the sovereignty of the states (increasingly moving to the principles of unified economic policy and economic decision-aggregation), which is not to be equated with the loss of sovereignty, but requires a new approach in the assessment of factors and motives of a national economic policy and its role in securing country’s sovereignty.

The key focus of this politico-economic research has been directed to European fiscal policy coordination, the implementation of the Stability and Growth Pact in Germany and German national adjustments in EMU. The primary objective has been to examine how and to what extent the formation of the Stability and Growth Pact has affected the implementation of German national fiscal policy in EMU. Europeanisation has been a useful and applicable concept in examining the extent to which EU institutions have mattered and affected German national economic policy-making as well as national policy responses in the EMU era. This research has clearly demonstrated that German national economic policy-making and national policy responses have also had a major impact on the role and functioning of EU institutions: the two-way relationship between EU institutions and Member States has been significant in fiscal policy coordination.