Fiscal Pact Research Articles

A Green Fiscal Pact for the EU: increasing climate investments while consolidating budgets

ABSTRACT To ensure sufficiently rapid decarbonization to meet the Paris Agreement goals, investments in green infrastructure will have to increase by an estimated 2% of world GDP annually, according to the International Energy Agency. A significant part of that investment will need to be funded with public resources – raising major tensions between consolidation needs after the high deficits during the pandemic and the need to increase investments. We consider this trade-off in the European Union, which has set itself one of the most ambitious climate targets in the world. The additional public investment required to meet the European Union’s climate goals is around 0.6% of GDP annually during this decade, which might increase if the green transition is accelerated due to Russia’s invasion of Ukraine. Budget consolidation can be done at a moderate pace in line with EU fiscal rules if those rules are interpreted flexibly, but past consolidation episodes resulted in major public investment cuts. A ‘green golden rule’ –excluding net green investment from the fiscal indicators used to measure fiscal rule compliance– is proposed as the most promising option to address this tension and would provide a positive incentive to undertake such investments. However, the uncertain growth impact of green public spending and the risks to growth from climate change create difficult trade-offs in fiscally weaker countries. Better regulatory policy and a higher price on emissions should in parallel incentivise private green investment and reduce public costs. These ingredients should be combined to form a ‘Green Fiscal Pact’. Key policy insights Public investments tend to be cut in fiscal consolidation episodes by vote-maximising politicians and thus need to be treated differently in fiscal rules. Increasing green public investments will be difficult in the upcoming consolidation period. A ‘green golden rule’ –excluding net green public investment from the fiscal rule indicators– is proposed as the best option to incentivise public climate investment. Policymakers need to underpin such a rule by clearly defining what constitutes emission-reducing climate investments and monitoring compliance. Fossil fuel subsidies should also be eliminated, and private climate investment should be incentivised through appropriate taxation and regulation. Climate change may tighten budget constraints in countries with already high debt levels because of its negative growth effects, so these countries should delay the introduction of the green golden rule.

Fiscal Policy Challenges for Latin America during the Next Stages of the Pandemic: The Need for a Fiscal Pact

"Volume 2021 (2021): Issue 077 (Mar 2021): Fiscal Policy Challenges for Latin America during the Next Stages of the Pandemic: The Need for a Fiscal Pact" published on 18 Mar 2021 by International Monetary Fund.

For a resilient, sustainable and inclusive recovery in Europe: challenges and proposals in response to the pandemic crisis

A corollary of the pandemic crisis and the unprecedented contraction of economic activity in Europe is the inevitable increase in public debt, and the need for active support of the European Central Bank (ECB), centred on the emergency purchase programme of government bonds. There is broad agreement on the general thrust of fiscal and monetary policies, but significant differences exist on the appropriate implementation and efficacy of policy impulses, notably between “Nordic” and “Peripheral” countries. This paper starts by reconsidering the dogma of balanced budgets as a general principle. A different approach is based on the taxonomy of deadweight and (re)productive debt. If government bonds finance capital expenditure (infrastructures broadly defined) with net returns higher than the cost of borrowing, the debt is fundamentally self-financing. More broadly, by reason of the huge warranted public investments (as documented by the European Investment Bank, EIB and the European Commission, EC), it is argued that “good” infrastructure capital accumulation represents a solution not only to the economic consequences of the pandemic crisis, but also to the issue of the savings glut. On the basis of this approach an assessment is offered of the responses to the crisis. Special attention is devoted to the EC proposal of the Recovery Fund. The model proposed here dovetails with the Recovery approach, and suggests a structural scheme to finance European Union (EU) infrastructures (monitored at EU level) through the issue of EU Real Infrastructure Securities (EURIS). The securities would comprise non only debt but also equity and equity-related instruments. The emphasis would be on Public-Private-Partnership initiatives. These real infrastructure securities would form the basis of a new European debt at Union level. The need to ensure rigour in public finances would be satisfied in two concurrent ways: the quality and net returns of the assets financed and a gradual move to a new fiscal pact, whereby national public deficits would be exclusively allowed for the financing of sound public investments, agreed and monitored at European level. Safety clauses would be introduced for exceptional events and to cope with cyclical developments (with full reversal in upturns).

Euro Area Macroeconomics. Where Do We Stand 20 Years Later?

For almost 20 years, euro area countries have been sharing a single currency. The drawbacks of the euro area framework were highlighted by the widening of imbalances prior to the 2007 financial crisis, and thereafter by the huge impact of the financial crisis, the public debt crisis in Southern European countries, and the Great Recession. Prior to and after the crisis, EU institutions and Member States (MS) have not been able to implement either a common economic strategy or satisfactory economic policy coordination.This led neither to a bursting of the euro area, nor to a substantial change in its functioning. Euro area institutions were adapted, through the European Stability Mechanism, the Fiscal Treaty, the “first semester”, the European Central Bank’s support to MS, and the banking union. These adaptations were painful.In mid-2018, the economic situation had clearly improved at the euro area level. However, the following question remains unsolved: can the functioning of the euro area be improved, accounting for divergent situations, interests and views in MS?The paper recalls proposals from EU institutions and from MS. We present and discuss a number of proposals made by economists to improve the euro area policy framework: relying on financial markets to control domestic economic policies, introducing a euro area budget and a minister of finance, moving towards a federal EU with increased democracy, and last, improving economic policy coordination.

¿Un nuevo sistema de fiscalidad extraordinaria? La Santa Hermandad de los Reyes Católicos (1476-1498)

The establishment of the Holy Brotherhood by the Catholic Monarchs supposed the transformation of the extraordinary fiscal system of the Crown of Castile. The incomes of the Parliament were replaced by a financial structure that was held on the new fiscal pact between the throne and the municipalities. The main pillar of this system was the transfer of the management of the extraordinary revenues to the cities of the kingdom. This article studies some of the key aspect of this measure, as well as the significant consequences that they had in the field of taxation and the State building process.

A Primordial Attachment to the Nation? French and Irish Workers and Trade Unions in Past EU Referendum Debates.

We aim to contribute to a better understanding of the dynamics that are driving EU politicization and the rising Euroscepticism of workers and unions in the public sphere. One explanation frames the rise in Euroscepticism in cultural terms, emphasizing workers’ alleged primordial attachment to their nation. A second uses socioeconomic frames, linking growing Euroscepticism to the increasingly neo‐liberal direction of the EU. The weight of these competing frames in the referendum campaigns on the EU Constitution in France and the Lisbon Treaty and the Fiscal Treaty in Ireland cannot be measured easily, as the categorization of a phrase as socioeconomic or cultural is in itself subject to political classification struggles. We therefore presents the findings of an inductive lexical analysis of all Irish Times, all Le Monde and all worker‐ or union‐related articles published in almost all national media outlets during the mentioned referendum debates. This was made possible by the Alceste software package that allowed us to analyse very large corpuses of articles inductively. Our analysis reveals that socioeconomic terms dominated policy debates in both countries. The findings question existing EU politicization studies that were measuring the salience of different frame types by deductive analysis.

Guatemala

This paper discusses key findings of the Fiscal Transparency Evaluation report on Guatemala. Guatemala has transparency practices that achieve the ratings of basic, good, and advanced regarding three-quarters of the principles established in the IMF’s Fiscal Transparency Code. The wealth of information available and the systems in place related to the public sector’s execution of its budget, finances, and accounts allow for easy access by the population to an impressive volume of fiscal data. However, there is much room for improvement in the area of fiscal transparency. Establishing a new fiscal pact in which the medium-term fiscal targets are defined would help create fiscal predictability and ensure that the major challenges of social and economic development are met.

The politicization of interparliamentary relations in the EU: Constructing and contesting the ‘Article 13 Conference’ on economic governance

Article 13 of the Fiscal Treaty (2012) prompted the creation of an interparliamentary conference to discuss and oversee the EU’s post-crisis regime of economic governance. However, the first meeting of the ‘Article 13 Conference’, in October 2013, was beset by conflict. Surprisingly, the main cleavage was not a left–right debate over economic policy (for example, pro- versus anti-austerity), but a debate about the nature and purpose of the conference itself. This pitted the European Parliament (EP), preferring a weak conference with a narrow mandate, against a number of national parliaments that preferred a strong conference with a broad mandate. This cleavage was apparent in a series of constitutional, institutional and procedural disagreements that arose over the course of the setting-up of the Article 13 Conference, many of which remained unresolved even after its second and third meetings, in January and September 2014. At the root of this struggle lay competing visions for the parliamentary oversight of the EU: Should scrutiny be centralized in the EP, or should there be a new system of joint scrutiny involving the EP and national parliaments together?

Current situation and future potential of further integration between UK and EU

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.

The Tax-Spend Debate and Budgetary Policy in Austria

In the aftermath of the 2008 financial and economic crisis, governments developed plans to steer fiscal policies back to a sustainable path. Austria is no exception, since the latest 2012 consolidation package aimed to balance the budget by 2016. For the success of consolidation policies, however, it is of great importance which fiscal policy strategies are pursued. For instance, should the deficit be reduced by reducing expenditure, by increasing revenue, or by a mixed coordinated policy? Empirical evidence from the mid-1990s indicated that Austria’s policy makers followed a path according to the spend-tax hypothesis, deciding on expenditure and then caring about the funding of public tasks. Since 1995, the year of Austria’s accession to the European Union, fiscal policy frameworks have changed (e.g., Maastricht Treaty, Fiscal Pact), and thus budgetary policies might have changed as well. The current paper provides new econometric evidence for a stable spend-tax fiscal policy decision process in Austria for the last 60 years. Therefore, it seems that the importance of reducing expenditure (about 72 % of the total consolidation volume in the current package) accounts for this principal approach in Austrian fiscal policy making. However, left open is whether the envisioned increase in revenues (about 28 % of the total consolidation volume) might be counterproductive for sustainably balancing the budget.

Los Techos Fiscales

Con el presente trabajo se pretende identificar si las medidas fiscales del Tratado de Lisboa (sustituto de la Constitución Europea), la Ley Fundamental alemana, el Tratado de Estabilidad, Coordinación y Gobernanza en la Unión Económica y Monetaria (Pacto Fiscal Europeo), y el Acto legislativo 3 de 2011 (modificatorio del Artículo 334 de la Constitución Política de Colombia) son una forma de restringir la materialización de los derechos de las personas. Metodológicamente se echará mano de la hermenéutica en tres niveles: en primera instancia, se recolectará información de diferentes fuentes; luego, se analizará la información encontrada; posteriormente, se reconstruirá el problema, para enseguida, mostrar los comportamientos de las condiciones fiscales en Colombia y Alemania. Por último, se extraerán unas consideraciones finales.

Putty Capital's Shadow of the Invisible Hand on Clay Labor: On the Emergent Risk of Differing Speeds of European Union Capital and Labor Freedom

Globalization led to unprecedented risks stemming from global interconnectedness. Economic trade may distribute benefits of international exchange unevenly due to fundamental barriers of distance, national borders and implicit market segmentation. In order to equalize trade prosperity, the European Union (EU) 4 freedoms of goods, services, capital and labor are established by a neoliberal policy framework and the Eurozone featuring a common currency. While there is a vital central monetary union and since the 2008/09 World Financial Crisis a common European fiscal pact, EU free trade is limited regarding labor mobility. Explicit labor transfer constraints comprise of work permission requirements and sector specific restrictions while implicit drawbacks arise due to specific language, cultural and skill requirements. The paper addresses risks emerging from labor immobility in combination with more vital capital and goods movements. Within the European compound, full capital flows and export opportunities may gravitate trade benefits towards original EU core countries, while periphery countries that became later part of the EU are shunned from full employment productivity. A less mobile workforce in the EU periphery is described as a reserve army of labor with social problems invisible to the core union as for remaining out of focus due to national borders and geographic distance. Trade movements within the EU are analyzed with attention to export, unemployment as well as migration patterns in order to advocate for attention to full labor freedom within the EU following the greater goal of Ricardian fair and mutually-beneficial trade enabled through a harmonious interplay of national government and European governance polity.

Zmiany w sektorze finansów publicznych w dobie kryzysu gospodarczego w Unii Europejskiej

The paper concentrates on changes in the public finance sector in recent years: a topic of great importance from the viewpoint of maintaining stability of finan‑ cial system and from both national and EU perspective. The effects of the current financial crisis have stressed the need for action to reduce the growing deficit and public debt. Debt crisis shows that it is necessary to conduct an effective fiscal con‑ solidation to put and maintain economies of many countries on a path of sustain‑ able growth. The paper begins with a brief presentation of theory. In the following part, the paper discusses structural and cyclical causes of the rising debt. Changes in the legal environment, including key issues, were also discussed. Fiscal rules, fiscal councils and the fiscal pact were therefore analyzed in detail. The authors furthermore pay attention to certain limitations and weaknesses of fiscal policy, stressing the necessity to look at the economy from a broader perspective and to use other tools and instruments of state policy. The study includes recent data on GDP, the budget deficit, public debt and expenditure and revenue in the EU.

Parliamentary Oversight of the EU after the Crisis: On the Creation of the 'Article 13' Interparliamentary Conference

Article 13 of the Fiscal Treaty (2012) foresaw that the European Parliament and national parliaments of the EU would convene a conference to “discuss budgetary policies and other issues covered by this Treaty.” However, the first Interparliamentary Conference on Economic and Financial Governance of the European Union, which met in Vilnius in October 2013, was beset by controversy. The main disagreements were not substantive (i.e. over economic policy choices) but rather constitutional, institutional, and procedural. They pitted the EP and its allies, favouring a weak conference with a narrow mandate, against a number of national parliaments (led by the host parliament, the Lithuanian Seimas), favouring a strong conference with a broad mandate. At the root of this institutional struggle for power lay competing visions for the parliamentary oversight of the EU: should scrutiny be centralized in the EP, or should there be a new system of joint scrutiny involving the EP and national parliaments together? These issues remained unresolved not only at the second conference (Brussels, January 2014), but also in the run-up to the third conference in Rome, hosted by the Italian Camera dei deputati, in September 2014.

Enforcing Austerity in Europe: The Structural Deficit as a Policy Target

In December 2011, the European Council proposed a Fiscal Pact for member states which would impose a binding limit on their structural deficits (SDs), as part of the wider set of measures intended to resolve the Eurozone's sovereign debt crisis. The proposal, adopted by 25 states in the course of 2012–2013, requires that this limit be imposed on each annual budget, with strict rules governing any breaches, subject to sanctions imposed by the Eurozone authorities. The paper examines the economic and political foundations of the measure. It is argued that the SD is meaningless as a policy target, since it is impossible to measure objectively, while politically it reinforces the depoliticisation of economic policy, under which technical experts replace elected governments in managing the national economy. The purpose of the Fiscal Pact is primarily to reassure business and financial élites that there will be no return to the state interventionism and excessive public spending that supposedly characterised the Keynesian era.

Demons, Ants, Giants and Dwarves: The Construction of Germany's Handling of the Euro Crisis in French Political Discourse

Since the beginning of the Euro crisis in 2009 a succession of one ‘last chance’ meeting after another has exposed deep rifts over the policies to implement in order to ensure the permanence of the Euro. From austerity measures to curb swelling public deficits put forward by Germany to European growth plans and solidarity mechanisms suggested by France, there have been serious disagreements and widespread infighting. The agreement of a new European Treaty creating a tight fiscal pact, at the European Summit on 7 December 2011, brought these tensions to the fore, leading to a barrage of criticisms in France against Germany imposing its austerity agenda on the whole Eurozone. This article seeks to analyse how Germany has been portrayed in the French political discourse by focusing on the vast array of reactions to this new treaty. It will show a discursive struggle between three discourse types representing Germany as an evil force intent on dominating Europe, a virtuous ant unwittingly dominating Europe and an economic giant but a political dwarf. These discourses will show how Germany is trapped into past representations and how these reveal far more about France's self-image in relation to its neighbour than about Germany itself.

Towards a better governance in the EU?

The 2007 global financial crisis developed from 2009 into a sovereign debt crisis in the euro area. These crises highlighted weaknesses and drawbacks in terms of EU governance which were already there from the beginning. Since 2010, the EU authorities have introduced a number of new mechanisms such as the Euro plus Pact, the Fiscal Pact, the “European semester”, the European stability mechanism, and more recently the banking union. Do these mechanisms improve EU governance? The EU remains so far an area of low growth and large imbalances. This volume is a release of twelve papers given at the 10th EUROFRAME Conference on economic policies in the European Union, held in Warsaw on 24 May 2013. In this volume, twentyfour economists give and discuss different views on how to improve governance in the EU: stricter fiscal rules and market discipline, redemption fund, fiscal federalism or ECB’s guarantee for public debts and more co-ordinated and growth targeted domestic fiscal policies. Other papers discuss the effects of fiscal policies, the right timing for fiscal consolidation, or propose new resources for the EU budget. This volume wishes to bring together a wide spectrum of contributions to the European debates on how to improve governance in the EU.

Institutional framework of the new economic governance in the European Union (European semester)

The subject of analysis in this paper is the institutional framework of the new economic governance in the European Union that has arisen as response of the member countries to the consequences of the global economic and financial crisis. In this sense, the author analyzed the provisions of the European semester, which is practically anticipated the creation of a fiscal union, more precisely, it is about the measures that should facilitate the centralization of fiscal policy through the Reform of the Stability and Growth Pact, the implementation of the reform Six-pack, in terms of tightening fiscal rules. Hereinafter, special attention is given to the provisions of the Fiscal Pact, which refers to the state budget and the structural constraints of the public debt. Within this document were adopted two additional: Euro Plus Pact and the Competitiveness Pact, which should help in maintaining the stability of the single currency and to simultaneously facilitate structural reform. European Semester represented the legal basis for the adoption of the Treaty on Stabilization, Coordination and Governance in the Economic and Monetary union, which further develops the idea of creating a fiscal union (trough the introduction of the so-called 'golden rule' on the state budget and impose strict sanctions by the European Court of Justice for their non-compliance). Notwithstanding the undoubted importance of new institutional mechanisms, there is a doubt that this institutional framework strengthens the discretionary power of the main EU member states and thus increases the risk of 'discrediting' of common institutions. Conditions for survival of the economic and monetary union is that management and decision-making back to the 'umbrella' of democratic processes and the competence of communitarian authorities. This paper seeks to answer the question why the new coordination mechanisms were not successful in resolving the crisis and provide specific recommendations de lege ferenda for creators of Serbian economic policy towards the European Union.

The EU's Economic Policy Architecture after the Ratification of the Fiscal Treaty

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, adopted in March 2012 and entering into force in January 2013, was presented as a reinforcement of the Stability and Growth Pact. The present Brief argues that this new Treaty does not seem to offer a definitive solution to the problem of finding the appropriate budgetary-monetary policy mix in the EMU and that it may complicate some aspects of the economic policy governance in the Eurozone.

On the Potential Pitfalls of the EU Fiscal Pact: A Simulation Study of the International Dimensions of Fiscal Austerity

A SP E C T E R IS H A U N TIN G EU R O PE— THE SPEC T ER OF FISC A L austerity. As it is widely known, the Fiscal Pact1 (officially the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union) attem pted to introduce a new legally enforced era o f fiscal austerity in the European Union.2 The EU Fiscal Pact puts forward two criteria intended to restrain fiscal policy am ong the signing EU m em ber states: the deficit criterion and the debt criterion. According to the deficit criterion, governm ent budget deficits are to be nearly balanced, with the cyclically adjusted budget deficit allowed to be at m ost 0.5 percent o f GDP if the current debt-to-GDP ratio is above 60 percent, and a budget deficit perm itted up to 1 percent if the debt-to-GDP ratio is below this threshold. According to the budget criterion, the level o f governm ent debt is to be brought down by an am ount equivalent to 5 percent o f the difference between the current debt ratio and the target debt ratio o f 60 percent o f GDP every year until the target debt-to-GDP ratio is reached.3 The intention is to reduce public debt, which in turn is supposed to foster econom ic grow th by allow ing private sector investm ent and consum ption to expand.