Excessive Deficit Procedure Research Articles

Fiscal policy in EMU: simulating the operation of the Stability Pact

We study the prospective operation of the Stability Pact by stochastic simulation. Using a forward-looking multi-country macroeconometric model, National Institute Global Econometric Model (NiGEM), comprising individual blocks for 10 Euroland economies, the Pact’s provisions are formalised in detail, and alternative monetary and fiscal rules are compared. Rules are simple and credible, but a fiscal feedback parameter is made conditional on the stages of the excessive deficit procedure. Under a baseline broadly consistent with Stability Programmes, excessive deficits are overall rare; pecuniary sanctions only happen when “fiscal fatigue” delays corrective action; and monetary policy is found to be of secondary importance to the results.

Editor's Introduction

The Stability and Growth Pact of the European Monetary Union (EMU) has received much attention from macro economists in recent years. Originally proposed by Germany's then finance Minister Theo Waigel in an attempt order to dilute the German public's fears of a weak euro, the Pact was received with sympathy by European policy makers. It was incorporated into the legislation governing EMU at the Amsterdam Summit of 1997. the Stability and Growth Pact adds more strength and precision to the provisions of the Excessive Deficit Procedure of the Maastricht Treaty and accelerates the relevant decision making procedures.

National and EU Budgetary Rules and Procedures: An Evolving Interaction

Fisher points out that while the Excessive Deficit Procedure and the Stability and Growth Pact introduce a framework of numerical rules and surveillance procedures to be conducted at the supranational EU level, it is up to each Member State to ensure the necessary conditions allowing the fulfillment of its EU obligations. In compliance with the subsidiarity principle, the EU framework does not give any indication on the set-up of national budgetary institutions. The author provides a broad overview on the interactions between the EU framework and national budgetary institutions and assesses if and how they are adapting and what are the areas of “friction”. Fisher notes that while institutional change takes time and the Pact is still very young, nevertheless the demands from the EU setting are gradually feeding into national budgetary frameworks. The major developments are identified in the evolution of medium-term budgeting mechanisms and in improved co-ordination within the general government. Additional pressures for change are expected as the focus at EMU level shifts away from budgetary consolidation towards the quality and sustainability of public finances and towards the co-ordination of economic policies in the euro area.

Public accounting fudges towards EMU: A first empirical survey and some public choice considerations

This paper analyses some one-off measures and other accounting tricks that EU member States have been using to qualify for EMU membership. Moving from empirical evidence to strategic goals, this investigation brings to the fore three crucial issues: the weakness of the methodological rules of the European system of accounts used to assess budgetary convergence in line with the Maastricht Treaty; the open-ended definition of the required budgetary discipline; the shortcomings of the excessive deficit procedure enforced through the Stability Pact. The conclusion urges a return to a strict annual balance requirement for governments' current accounts, to impede strategic adjustments of budgetary positions that are in fact creative accounting operations.

European monetary unification: a tour d'horizon

This article takes stock of the literature and debate over European monetary unification. In contrast to other papers, where it is argued that the issues and prospects remain shrouded in uncertainty, I argue that in a number of important areas, a reasonable degree of consensus now exists, as the result of a decade of scholarship. The subsequent stock-taking concentrates on areas where significant questions remain, starting with the implications of surrendering the exchange rate and an independent national monetary policy as instruments of adjustment; the conduct of fiscal policy under the Excessive Deficit Procedure and the Stability Pact; and how quickly the European union is likely to develop an EU-wide system of fiscal federalism to accompany its monetary union. Turning from fiscal to monetary issues, I ask whether the European Central Bank (ECB) will be as inflation averse as the Bundesbank, what exchange-rate policy the ECB will pursue, and whether the euro will be a leading reserve currency. I conclude with what may be the most contentious issue of all, namely whether Europe's monetary union could collapse after it begins.

Politique budgétaire et union monétaire : existe-t-il un arbitrage entre fédéralisme et restrictions budgétaires ?

Policy Mix and monetary union : is there a tradeoff between federalism and budgetary restrictions The Maastricht Treaty on Europe Union features an Excessive Deficit Procedure limiting the freedom to borrow of government participating in the European monetary union. One justification is to prevent states from over-borrowing and demanding a bailout which could divert the European Central Bank from its pursuit of price stability. We challenge this rationale. Using data from a cross section of federal states, we show that there is no association between monetary union and restraints on borrowing by sub-central government. There is however an association between fiscal restraints and the share of the tax base under the control of sub-national authorities. The implications for the EU are direct. That EU member states control their own taxes should strengthen the hand of authorities seeking to resist pressure from a bailout. In the longer run, however, borrowing restrains may weaken the financial position of Brussels, transferring bailout risk from the member states to the EU itself.

Budgetary Policies during Recessions Retrospective Application of the “Stability and Growth Pact” to the Post-War Period

SummarySolid budgetary discipline is an essential condition for the success of Economic and Monetary Union (EMU). The “Excessive Deficit Procedure” and the “Stability and Growth Pact” allow some flexibility for the conduct of budgetary policies during severe economic slowdowns. The paper examines whether European Union Member States will have to change their budgetary policies carried out during and after severe recessions, once these procedures become fully operational in the third stage of EMU. The results of this analysis suggest that, when starting from a budgetary position of close-to balance or in surplus, the risk of breaching the 3% reference value is relatively low during one-year recessions but increases in case of deep or protracted recessions. The early years of EMU, when some countries might still have a deficit of about 2% of GDP, are likely to prove highly problematic in the event of a severe recession.

Saving Europe's Automatic Stabilisers

European policymakers have repeatedly suggested that fiscal-policy coordination and fiscal federalism will play key roles in Europe's monetary union. This paper warns that this hope is misplaced. Fiscal federalism will not be available to offset recessionary shocks for the foreseeable future. The effects of coordination designed to internalise the cross-border spillovers of fiscal policies are too weak. Freeing up fiscal policy to replace national governments' loss of monetary independence requires allowing European countries' automatic stabilisers to operate. That in turn requires a flexible application of the Excessive Deficit Procedure and the Stability Pact.The solution suggested here is that the Excessive Deficit Procedure and any fines and sanctions associated with the Stability Pact be applied to the constant-employment budget balance, not the actual deficit. Applying them to actual deficits when European countries enter EMU up against the 3 per cent limit will render fiscal policy strongly procyclical, aggravating the problem of macroeconomic fragility created by the loss of monetary autonomy. Still, countries like Germany haunted by the spectre of fiscal pro fligacy need to be reassured that member states will not abuse their fiscal discretion. Procedural and institutional reform to offset the deficit bias in national political systems is the obvious quid pro quo.

Fiscal restrictions and monetary union: Rationales, repercussions, reforms

We offer a critique of the fiscal preconditions for participation in Stage III of EMU and the Excessive Deficit Procedure of the Maastricht Treaty. We show that the high output costs associated with meeting the fiscal preconditions in Stage II and the incompatibility of the reference values for fiscal policy with other convergence criteria make it unlikely that a mechanical interpretation of those conditions will govern admission to Stage III. Knowledge of this fact will deter governments from undertaking major fiscal adjustments in the first place. Hence, the fiscal criteria of the treaty will not function as an efficient filter for distinguishing countries that are and are not prepared to live with the fiscal consequences of EMU.