Growth Pact Research Articles

Integración, convergencia e (in) cumplimiento del Pacto de Estabilidad y Crecimiento : coordinación de políticas económica en la Unión Europea

This essay details the problems and perspectives in the coordination of economic policies in the European Union given the complexity and uncertainties of the current integration process. The first stages of integration are described and the content and problems of political-economic application of the Stability and Growth Pact that underlie not only the achievement of the Economic and Monetary Union, but also its future permanence, are analyzed. The political-economic pact supposes the endorsement of entry into the EMU but, also, the commitment of coordination of the current members of the EU and the demands for new partners. However, the degree of (non) compliance with the Pact is significant as it illustrates not only the difficulties of harmonization and coordination of economic policies but also the internal correlation of strength and power of influence of the different members of the EU. Finally, the cases of Germany and France are studied.

The Greek Sovereign Debt Crisis: Antecedents, Consequences and Reforms Capacity

The purpose of this paper is to investigate the antecedents and the consequences of the Greece debt crisis as well as highlighting the reforms capacity. The approach adopted in this paper is to answer the questions such as “what is the background of the Greece debt crisis and how it is originated?”, “which antecedents caused the Greece vulnerable to the crisis?”, “what are the twin constraints being faced by Greece and its consequences?”, “which measures are taken to gain fiscal stability in the Greece under Stability and Growth Pact?” and “what are the rescue possibilities available to Greece to withstand the crisis? Is bail out the only possible solution?” These questions are used to guide the search or studies and analysis thereof and major emerging themes are presented. The key findings of the study are some main factors that triggered the crisis. These are misstated statistics by Greek government, weak co-ordination and organization, high expenditures in comparison to revenues, corruption, tax evasion, weak welfare system and inflexible employment laws. The research limitation is based on the limited scope of the study as some important question regarding the Greece debt crisis is yet to be answered and some aspects of literature are needed to be explored further. Since the main objective of this study is to explore the antecedents that caused Greece vulnerable to the crisis and its aftermaths, it also aims at explaining the fiscal stability measures under taken by Greece under Stability and Growth Pact along with explaining the bail- out alternative available to the Greece perhaps as a last resort. Moreover, this paper highlights the various steps being upheld for reforming Economic Monetary Union (EMU) governance. Thus, this study provides an opportunity to probe into the overall economic and fiscal scenario of Greece under debt crisis.

Ruling Europe: The Politics of the Stability and Growth Pact by Martin Heipertz and Amy Verdun

Journal Article Ruling Europe: The Politics of the Stability and Growth Pact by Martin Heipertz and Amy Verdun Get access Ruling Europe: The Politics of the Stability and Growth Pactby Martin Heipertzand Amy Verdun. New York, Cambridge University Press, 2010. 332pp. $95.00. David M. Andrews David M. Andrews Scripps College Search for other works by this author on: Oxford Academic Google Scholar Political Science Quarterly, Volume 126, Issue 2, Summer 2011, Pages 330–331, https://doi.org/10.1002/j.1538-165X.2011.tb02135.x Published: 25 March 2013

Economic and Monetary Union – Current Fiscal Disturbances and the Future

At the moment of its setting up the Economic and Monetary Union did not meet the criteria of the optimum currency area. Neither does it today. The crisis of public finance in the eurozone results from the abandonment public finance reforms, lack of consistency in enforcing the decision of the Stability and Growth Pact and, additionally, economic recession and financial crisis. Further functioning of the eurozone will depend on radical reforms of public finance and structural reforms enhancing efficiency of the market as an adjustment mechanism, and competitiveness of economies. The very establishment of the European Stabilization Mechanism and European Financial Stability cannot make up for the above mentioned necessary undertakings. It is important to change the socioeconomic model existing in the EU member countries.

Un nouveau dispositif d'assainissement budgétaire en Europe

Résumé La situation actuelle de la Grèce illustre clairement que les règles du Pacte européen de stabilité et de croissance, PSC, n’ont été ni assez strictes, ni assez scrupuleusement respectées. Pour sortir de l’impasse budgétaire actuelle et de la crise qu’elle provoque, nous proposons un nouveau dispositif d’assainissement budgétaire en Europe. Le cœur du dispositif s’appuie sur un Pacte européen de consolidation (PEC), complétant le PSC avec cinq nouvelles caractéristiques. Les pays adhérents au Pacte devraient présenter un plan de retour à l’équilibre de leur budget, incluant les modalités concrètes de réduction des dépenses structurelles ; ils devraient mettre en place une loi prévoyant une augmentation automatique des impôts en cas d’écart à la trajectoire définie de leur solde budgétaire ; ils pourraient assurer auprès du PEC que chaque nouvelle émission de dette publique soit conforme au plan spécifié ; les primes d’assurance correspondraient à un certain pourcentage du montant émis ; le non respect de la loi d’augmentation automatique des impôts ou la sortie volontaire du pacte de consolidation impliquerait que les futures émissions de titres publics ne bénéficieraient pas de la garantie du PEC : soit le pays n’a plus besoin de garantie, soit il souhaite faire défaut. Dans ce dernier cas, le nouveau dispositif préciserait les modalités d’un défaut sur la dette publique.

Towards expenditure rules and fiscal sanity in the euro area

The study demonstrates the key role of expenditure policies in explaining fiscal developments during EMU in the euro area, its three largest members and four “macro-imbalances” countries. It compares actual primary expenditure trends with those that would have prevailed if countries had followed neutral policies based on expenditure rules since the start of EMU. Moreover, the implications for debt trends are calculated. Results show that all sample countries except Germany applied expansionary expenditure policies already before the crisis. Consequently, expenditure and debt paths were much higher compared to a counterfactual neutral expenditure stance. Rule-based expenditure policies could have led to much safer fiscal positions much more in line with the EU's Stability and Growth Pact. An empirical analysis of the determinants of countries’ expenditure stance confirms the need for stronger fiscal rules and institutions in the euro area.

Kosten des Europäischen Finanzstabilisierungsmechanismus (EFSM) aus deutscher Sicht / The Costs of the European Financial Stability Facility (EFSF) – The German Point of View

Summary The European Financial Stability Facility (EFSF), which is supported by the German Gesetz zur Übernahme von Gewährleistungen im Rahmen des europäischen Stabilisierungsmechanismus (StabMechG), suspends the Stability and Growth Pact as the basis of the European Economic and Monetary Union. The actual ‘suspension’ from the ’no bail-out’ restriction (Art. 125 TFEU) and the prohibition of funding national debts (Art. 123 TFEU) transfers risks and financial burdens from deeply indebted states to solvent EU member states. As a result an unauthorized „transfer union‘‘ emerges, whose Central Bank lost its independence to a political leadership and cannot focus on its objective of price stability as contracted any longer. Even without the use of financial and guarantee aids the German economy suffers from a distorted yield structure and crowding-out effects of private investments. From the economic point of view the used measures are neither appropriate nor necessary for achieving financial stability within the European Economic and Monetary Union. Much less these measures are proportionate. Of course, the alternative of accepting a ‘controlled’ national bankruptcy would not have been without its formidable costs.However, its attribution of arrangements in the line with market requirements and the adherence to EU-contract provisions would have been the more worthwhile regulatory policy option for a more solid budgetary policy in the future.

The New Stability and Growth Pact: Primum Non Nocere

The recent economic and financial crises have shown the weakness of EU economic governance. A process of strengthening macroeconomic and fiscal surveillance started in the course of 2010; among other proposals, the European Commission suggested a new binding criterion of debt reduction: debt-to-GDP ratio is to be considered sufficiently diminishing if its distance with respect to the 60% of GDP reference value has reduced over the previous three years at a rate of the order of one-twentieth per year.In this Working Document, ISTAT Researchers Marco Fioramanti and Claudio Vicarelli try to evaluate, with the support of the Oxford Economic Global Model, the economic consequences of the simultaneous attempt of all euro area countries to fulfil this one-twentieth criterion in the 2011-2015 period. Simulation results show that the mechanical application of the debt rule proposed by the European Commission would be only marginally efficient in reducing the debt to GDP ratio at best, but with high costs represented by the loss of flexibility, and counterproductive at worst.

Public Investment under Fiscal Constraints*

AbstractThe new member states (NMS) of the European Union must comply with the Stability and Growth Pact (SGP) and the investment goals implied by the Lisbon Agenda. However, the SGP rules may result in underinvestment or distortions in the allocation of public expenditure. This paper provides new evidence on the effects of debt sustainability and the SGP fiscal constraints on government expenditure on fixed capital, education and health in OECD countries by estimating government expenditure reaction functions to public debt and cyclical conditions. We find that, at high levels of debt, government capital expenditure and education expenditure are significantly reduced as the debt ratio increases in all OECD countries independently of EMU (or EU) membership. By contrast, neither capital expenditure nor education expenditure is affected by the debt ratio in low‐debt countries. These findings are robust to the inclusion of the government deficit in the estimated reaction functions. Hence, it appears that EU countries have been constrained in their investment decisions more by the need to ensure debt sustainability than by the rules of the SGP. In low‐debt NMS countries, public investment even increases with the debt ratio, a finding that is reassuring for their growth prospects. However, a less optimistic picture emerges when we focus on expenditures on public health and education, as it appears that NMS governments cut such expenditures – even at low levels of debt – as the deficit increases. Problems in controlling total expenditure together with the preventive arm of the SGP may have penalised investment in human capital in the NMS while leaving fixed capital investment unaffected.

The Design Faults of the Economic and Monetary Union

The basic proposition of this paper is that the economic problems which have threatened the existence of the euro have not arisen in the main through ‘bad’ behaviour of some member states. They rather come from ‘design faults’ in the construction of the euro project. These faults can be seen as present in the nature of the convergence criteria which focus on nominal rather than real variables; pay no attention to the validity of the exchange rates at which countries enter the EMU, or to the prevailing current account deficits and surpluses; nor to the differences in inflation mechanisms between countries. These ‘design faults’ continue with the inadequacy of a fiscal policy based on numerical targets operating at the national level. The design of the ‘independent’ European Central Bank has largely precluded the necessary co-ordination of fiscal and monetary policy, and has also disabled the central banking system from providing sufficient support to national governments and their budget deficits. It is concluded that a complete re-design of the Stability and Growth Pact and related policies is required.

Przyszłość paktu stabilności i wzrostu

Przyszłość paktu stabilności i wzrostu

Practice and Prospects of Medium-term Economic Forecasting

Summary Government agencies and other national and international institutions are asked to perform forecasts over the medium term. In particular, the EU Stability and Growth Pact contains the obligation to formulate stability programmes over four years, covering a general economic outlook as well as the projected development of public finances. However, the current practice of performing medium-term economic projections is unsatisfactory from a methodological point of view as the applied methodology has been developed for short-run forecasting and it is questionable whether these methods are useful for the medium term. In particular, currently medium-term projections are mostly based on the neoclassical Solow growth model with an aggregate production function with labour, capital and exogenous technological progress. It might be argued, however, that for medium-run projections endogenous growth models might be better suited. In this paper we give an overview of currently used methods for medium-term macroeconomic projections. Then we analyse the performance of medium-term forecasts for Austria to illustrate the strengths and weaknesses of the typical approach. In particular, the five-year projections of real GDP growth, inflation and the unemployment rate are investigated. Finally, we describe some approaches to improve medium-run projections.

The political economy of EDP fiscal forecasts: An empirical assessment

We analyse the budget balance forecasts prepared by 15 European countries in their Excessive Deficit Procedure reportings, studying the statistical properties of forecast errors and their politico-institutional determinants. Forecast errors are responsive to growth surprises, fiscal institutions and opportunistic motivations: upcoming elections induce over-optimism, most apparent when the opposition wins, whereas commitment or mixed forms of fiscal governance and numerical expenditure rules (unlike deficit and debt rules) are associated to greater prudence. The main findings hold when using forecasts from national draft budgets. Taking subsamples reveals that opportunistic and institutional effects are only significant under the Stability and Growth Pact.

Fiscal Expectations Under the Stability and Growth Pact: Evidence from Survey Data

The paper uses survey data to analyze whether financial market expectations on government budget deficits changed in France, Germany, Italy, and the United Kingdom during the period of the Stability and Growth Pact (SGP). Our findings indicate that accuracy of financial expert deficit forecasts increased in France. Convergence between the European Commission's and market experts’ deficit forecasts also increased in France, Italy, and the United Kingdom, particularly during the period after SGP’s reform in 2005. Yet, convergence between markets’ forecasts and those of the French, German, and Italian national fiscal authorities seems not to have increased significantly during the SGP.

Have Euro Area and EU Economic Governance Worked? Just the Facts

We test whether two key elements of the EU and Euro Area economic governance framework, the Stability and Growth Pact and the Lisbon Strategy, have had any impact on macroeconomic outcomes. We test this proposition using a difference-in-difference approach on a panel of over 30 countries, some of which are non-EU (control group). Hence, the impact of the EU economic governance pillars is evaluated based on both the performance before and after their application as well as against the control group. We find strong and robust evidence that neither the Stability and Growth Pact nor the Lisbon Strategy have had a significant beneficial impact on fiscal and economic performance outcomes. We conclude that a profound reform of these pillars is needed to make them work in the next decade.

Fiscal Expectations Under the Stability and Growth Pact: Evidence From Survey Data

The paper uses survey data to analyze whether financial market expectations on government budget deficits changed in France, Germany, Italy, and the United Kingdom during the period of the Stability and Growth Pact (SGP). Our findings indicate that accuracy of financial expert deficit forecasts increased in France. Convergence between the European Commission's and market experts’ deficit forecasts also increased in France, Italy, and the United Kingdom, particularly during the period after SGP’s reform in 2005. Yet, convergence between markets’ forecasts and those of the French, German, and Italian national fiscal authorities seems not to have increased significantly during the SGP.

Political deparadoxification through structural coupling in the EU: a reinterpretation of the Stability and Growth Pact

ZusammenfassungDer Aufsatz schlägt vor, auf der Basis der Luhmannsschen Theorie eine Reinterpretation des Stabilitäts- und Wachstumspakts der EU vorzunehmen. Die Argumentation basiert auf theoretischen Weiterentwicklungen, die innerhalb der neueren Systemtheorie im Zuge der Beschäftigung mit europäischen Studien vorgenommen worden sind. Es wird argumentiert, dass »ungleiche Europäisierung« sozialer Systeme (Jachtenfuchs) als ein anderer Ausdruck für funktionale Differenzierung zu strukturellen Änderungen innerhalb sozialer Systeme führt und zu einer Redefinition von Kopplungsprozessen in Europa. Der Stabilitäts- und Wachstumspakt ist ein besonders augenfälliges Beispiel dafür. Deshalb wird der Eurostabilitätspakt im vorliegenden Text als eine strukturelle Kopplung von ökonomischem und politischem System analysiert. Ein genauerer Blick auf seine Entstehung führt dabei zu einer Verteidigung der Ansicht, dass es fruchtbar sein könnte, ihn aus einer polykontexturalen Perspektive zu betrachten, wie es im europäischen Kontext generell sinnvoll erscheint, strukturelle Kopplungen verstärkter in den Blick zu nehmen. Auf der Basis des Luhmannsschen Konzepts der Entparadoxierung sozialer Systeme durch die Bezugnahme auf ihre Umwelt wird eine Interpretation des Eurostabilitätspakts vorgenommen, nach der der Ausgangspunkt des Pakts trotz einer vermeintlichen ökonomischen Intention im Wesentlichen in dem politischen Prozess einer Entparadoxierung durch die Bezugnahme auf das ökonomische System liegt.

Myopic Governments and Welfare-Enhancing Debt Limits

This paper studies welfare consequences of a soft borrowing constraint on sovereign debt which is modelled as a proportional fine per unit of debt exceeding some reference value. Debt is the result of myopic fiscal policy where the government is assumed to have a smaller discount factor than the private sector. Due to the absence of lump-sum taxation, debt reduces welfare. The paper shows that the imposition of a soft borrowing constraint, which resembles features of the Stability and Growth Pact and which is taken into account by the policy maker when setting its instruments, prevents excessive borrowing. The constraint can be implemented such as to (i) control the long run level of debt, (ii) prevent debt accumulation, and (iii) induce debt consolidation. In all three cases the constraint enhances welfare and in a welfare ranking these gains outweigh the short run welfare losses of increasing the costs of using debt to smooth taxes over the business cycle. JEL Classification: H3, H63, E6

Fiscal implications of the crisis and the future of the EU fiscal framework

This paper presents the fiscal implications of the crisis within a European context and suggests improvements to the EU fiscal framework in the light of the lessons learnt from financial crises and the consequences that these might have on fiscal sustainability, particularly given the ageing of the European population over the coming years. Indeed the consequences of demographic change are shown to be substantial. This paper suggests that the European fiscal framework take a broader view of fiscal risks in the future, that its implementation focus more strongly on the quality of the adjustments that will be necessary in the coming year, and that enforcement of the Stability and Growth Pact be strengthened, in order to ensure that European public finances are best able to weather the challenges of the future.

Krisenreaktion und Krisenprävention im Euro-Raum: Wandel zum Besseren? / Crisis Mangement and Prevention for the Eurozone: A Change for the Better?

Zusammenfassung Die Wirtschaftskrise des Jahres 2007 führte in nahezu allen entwickelten Volkswirtschaften zu einer akuten Belastung der öffentlichen Haushalte. Insbesondere die GIIPS - Länder - Griechenland, Irland, Italien, Portugal und Spanien - stehen vor der enormen Herausforderung, ihre aus unterschiedlichen Gründen ausgelösten Haushaltskrisen zu bewältigen. Zur Krisenbewältigung kommen ein offener Zahlungsausfall, eine Konsolidierung durch Inflation und eine Haushaltskonsolidierung in Frage. Alternativ besteht die Möglichkeit dauerhafter europäischer Unterstützungsleistungen im Rahmen des Europäischen Stabilisierungsmechanismus als Element des Förderns in fiskalischen Problemlagen. Während es für Staaten mit Liquiditätsproblemen triftige Gründe für solche (temporären) Leistungen gibt, sind bei dauerhafter Stützung deutlich negative Auswirkungen vorhanden. Diese zu minimieren muss Ziel der europäischen Politik sein. Die signifikante Verschärfung des Stabilitäts- und Wachstumspakts ist das notwendige Gegenstück zur Förderung. Wird dieses Element des Forderns in der Praxis unzureichend umgesetzt, verschiebt sich das Gleichgewicht innerhalb der Währungsunion dauerhaft zugunsten ungehinderten Trittbrettfahrertums.