Growth Pact Research Articles

Fiscal Forecasting: Lessons from the Literature and Challenges*

Abstract.While fiscal forecasting and monitoring has its roots in the accountability of governments for the use of public funds in democracies, the Stability and Growth Pact has significantly increased interest in budgetary forecasts in Europe, where they play a key role in EU multilateral budgetary surveillance. In view of the increased prominence and sensitivity of budgetary forecasts, which may lead to them being influenced by strategic and political factors, this paper discusses the main issues and challenges in the field of fiscal forecasting from a practitioner's perspective and places them in the context of the related literature.

Euroland and the world economy: global player or global drag?

Introduction J.Bibow & A.Terzi PART I: EUROLAND ON A COLLISION COURSE Global imbalances, Bretton Woods II, and Euroland's Role in All This J.Bibow Wage Divergences in Euroland: Explosive in the Making H.Flassbeck Can the Euro Area Play a Stabilizing Role in Balancing Global Imbalances? P.Arestis & M.Sawyer PART II: POLICY COORDINATION AND INCREASED INTEGRATION AS MEANS TO PROPERLY STEER EUROLAND Whatever Happened to 'Policy Coordination'? J.Forder The Economic Rationale of the EMU and the Euro C.Sardoni Righting Global Imbalances: Recession, Protection or Reflation? A.Izurieta & G.Irvin PART III: REFORMING EUROLAND'S INSTITUTIONAL FRAMEWORK AND MACROECONOMIC POLICY GOVERNANCE Replacing the Stability and Growth Pact? C.Goodhart Fiscal Policy and Macroeconomic Performance in the Euro Area: Lessons for the Future E.Hein & A.Truger Germany's Choice and Lessons from Japan: Supply vs. Demand Policy, Fiscal vs. Monetary Policy R.Werner You Can't Always Get What you Want: Why Europe is not Keynesian-able while the US New Economy is Driven by Financial Keynesianism R.Bellofiore & J.Halevi PART IV: PROSPECTS AND LIMITS OF THE EURO AS A GLOBAL CURRENCY 'Not My Fault' or Would Spreading the Maastricht Wisdom beyond Europe Really Do Much Good At All? J.Creel & F.Capoen The Role of the Euro in the International Monetary Arena: Present and Prospects S.Rossi International Payments Imbalances and the Prospective Role of the Euro A.Terzi

Pensions under Ageing Populations and the EU Stability and Growth Pact

This article explores how the Stability and Growth Pact (SGP) may cope with the future costs of population ageing in the European Union. Clearly, population ageing has forced countries to reform their pension systems, and will continue to do so, both by reducing the generosity of pension arrangements and by switching to funding rather than relying on pure pay-as-you go pension provision. We study how such reforms affect the room for adhering to the SGP, but also how the SGP may induce or hamper the incentives for reform. We will refer to recent literature on ageing and pensions and on the SGP. We also calibrate a simple model for addressing intergenerational equity and discuss its implications for the SGP. (JEL codes: H11, H55, H60)

Structural Reforms and Fiscal Discipline in Europe

In this paper we provide an overview on recent contributions on the effectiveness of the institutional framework operating in Europe to fulfil the objectives declared in the Lisbon Agenda under the fiscal constraints established in the Stability and Growth Pact. After a review of the Stability and Growth Pact as well as the Lisbon Strategy and the Sapir Report, we discuss the relations between fiscal policy and structural reform. Finally, we focus on 2D points in the EU debate on institutional reforms: government short-sightedness and the coordination of national fiscal policies at the European level.

The EU's Stability and Growth Pact: Its Credibility and Sustainability

The Stability and Growth Pact (SGP) of the European Union has come under fire for failing to rein in budget deficits and for the ineffectiveness of its sanctions. By examining trends in public debt and budgetary positions, this article examines whether the SGP has met its objectives and considers the extent to which implementation was affected by the accession of 10 new member states in 2004.

Monetary integration in Europe

The History of Monetary Integration in Europe Theory of Optimum Currency Areas The Economic and Monetary Union: Institutions and Credibility The Monetary Policy Strategy of EMU Fiscal Policy Coordination and the Stability and Growth Pact The EMU and the Wage Bargain Real Convergence in a Monetary Union The New European Monetary System

An assessment of the EU growth forecasts under asymmetric preferences

AbstractEU Commission forecasts are used as a benchmark within the framework of the Stability and Growth Pact, aimed at providing a prudential view of economic outlook, especially for member states in an Excessive Deficit Procedure. Following Elliott et al. (2005), we assess whether there exist asymmetries in the loss preference of the Commission's GDP growth forecasts from 1969 to 2004. Our empirical evidence is robust across information sets and reveals that the loss preferences tend to show some variation in terms of asymmetry across member states. Given certain conditions concerning the time horizon of forecasts and the functional form of the loss preferences, the evidence further reveals that the Commission forecasting exercise could be subject to caveats. Copyright © 2008 John Wiley & Sons, Ltd.

Ricardian fiscal regimes in the European Union

The prevalence of different fiscal regimes is important both for practical policy reasons and to assess fiscal sustainability, notably for European Union countries. The purpose of this article is to assess, with a panel data set, the empirical evidence concerning the existence of Ricardian fiscal regimes in EU-15 countries. The results give support to the Ricardian fiscal regime hypothesis throughout the sample period, and for sub-samples accounting for the dates of the Maastricht Treaty and for the setting-up of the Stability and Growth Pact. Furthermore, electoral budget cycles also seem to play a relevant role in fiscal behaviour.

The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe

Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP as always being accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Gali and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries after the Maastricht Treaty. This paper concludes that this conclusion resists to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to a decrease in the use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999-2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in the forecast of the output gap, and not the result of a change in the intentions of policy makers. As a result, there is no evidence in favour of the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policy.

The stability and growth pact, fiscal policy institutions and stabilization in Europe

Ever since its inception, the EMU has been subject to controversy. The fiscal policy rules embedded in the Maastricht Treaty, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP has constantly been accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries since the Maastricht Treaty. This paper argues that this conclusion stands up to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data, there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to less use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999–2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in forecasting the output gap, and not the result of a change in the intentions of policy-makers. As a result, there is no evidence to support the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policies.

Public Debt in Germany: At the Turning Point or Ever-Increasing?

Since 1970 public debt in Germany has risen dramatically. The debt growth has neither been stopped by the constitutional deficit limit, nor by the European Stability and Growth Pact. At the moment, the cyclical upswing triggers increasing tax revenues and diminishing deficits. Yet this does not mean that fiscal fundament is sustainable. What are the chances for a structural consolidation of public finances? Which institutional reforms must be envisaged? Can these changes be accomplished in the planned second round of the reform of intergovernmental fiscal relations?

Balanced Budget Rules in Europe: A Comparative Institutional Analysis

One of the main economic problems of our time is that of reducing budget deficits. In Europe the “Stability and Growth Pact” should reduce deficit spending and government debts. But EU core countries such as France, Germany and Italy have been in violation of the Pact consistently for a lot of years. In contrast some countries at the European periphery are very successful in reducing their deficit. Others are able to prevent their budgets from being unbalanced. For instance Denmark - a long term member of the European Union and typical welfare state - has recorded a surplus in its national budget since 1997. Ireland - sometimes the poorest member of the Union and nowadays one of the richest ones - reduced its debts from more than 80% of GDB to less than 40%. The new EU-member Estonia has been successful in keeping the budget deficit low since independence in 1992. In this paper the different balanced budget rules in Denmark, Ireland and Estonia are analyzed in brief and compared. As can be shown balanced budget rules are able to reduce budget deficits respective to hinder the development of larger deficits. But it must be also emphasized that political consensus about the reduction of deficits respective of a consequently balanced budget is the most successful strategy. Primarily, this seems to be possible in small sized countries. Here formal rules can be seen as more or less redundant. But even where no consensus exists constitutional rules and additional application rules are necessary. As result the author demands stronger balanced budget rules in the European Union treaties to force also larger member countries into fiscal stabilization.

A dynamic rule applied to the threshold imposed on the European budgetary deficits

Up until now, European fiscal discipline has been essentially assessed on the basis of the deficit rather than on the debt situations of EU countries. However, the sustainability of the public debt depends on the discrepancy between the interest rate and the growth rate of any given country. As these future economic variables are difficult to anticipate, however, the present paper proposes a more applicable rule for the deficits. Unlike what is stated in the Stability and Growth Pact, the budgetary deficits in the European Union may therefore be kept at higher levels as a country maintains a high inflation or real growth rate, and a low level of public indebtedness.

Penzijní reforma v ČR: konverze ke kombinovanému systému s ohledem na limity fiskální politiky

The Czech Republic is going to face ageing of its population. It will affect the economy in many ways. The pension system is one of them. This paper provides a view on possibilities how to insure long-term stability of the pension system in the Czech Republic using a mix of pay-as-you-go and fully funded system. Simulations are based on OLG model, long-term demographic forecast and limits of fiscal policy stemming from the necessity to fulfill Maastricht criteria and The Stability and Growth Pact. Those obligations creates a frontier for plausible solutions. Results suggest that it is possible to find a solution for mixed system providing more favorable conditions than purely parametric changes of PAYG. Taking into account fiscal limits, the contribution rate to the FF pillar would be similar to the rates in other CEE countries where pension reform already started.

Negotiating in stages: National positions and the reform of the Stability and Growth Pact

Abstract. This article examines the politics of the 2005 reform of the Stability and Growth Pact (SGP). It distinguishes between two stages in the reform process. The first stage delimited the negotiation space – confining reform into an interpretation of the formal clauses that prescribe SGP functioning – and set the reform agenda. In the second, decision‐making stage, Member States engaged in high politics bargaining, more sensitive to their short‐term (fiscal deficit) and long‐term (fiscal sustainability) macroeconomic conditions, attempting to upload country‐specific ‘expenditure exceptionalism’. The authors of this article find a crucial disjunction in some Member States between positions held across the two stages. Strategic considerations, comprising the broader constitutional/political game and the need to demonstrate national macroeconomic credibility, account for such discrepancy in the two negotiation stages.

The Stability and Growth Pact Germanising the Euro

The Stability and Growth Pact (SGP) was agreed upon by the European Union Member States in 1997 to maintain and enforce fiscal discipline in the EU. Applying the agenda-theory approach, this paper seeks to explain how the German government was influenced by domestic actors such as the German Central Bank, parties, labour unions, and employers' associations during the negotiations. The evolution of the SGP was strongly influenced by the ideas, interests and ideologies of the German media democracy. Our findings show that the SGP constituted a political instrument that was implemented to overcome the German public's scepticism of a united Europe. While many of the domestic actors played critical roles during the process, the German Central Bank, assisted by the Federal Government, was of paramount importance during the negotiations. Germany's leading role in the SGP negotiations can be explained by the European-wide acceptance of its exemplary decades-long stabilisation policy.

Fiscal Sustainability and Policy Implications for the Euro Area

In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses.

Strategic Interactions Among Central Bank and National Fiscal Authorities in a Monetary Union Subject to Asymmetric Country Shocks

In this paper we extend Nordhaus’ (Brookings Pap Econ Act (2):139–199, 1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that, even assuming that the monetary and the fiscal authorities share the same ideal targets, in the presence of asymmetric shocks the “symbiosis” result found by Dixit and Lambertini (J Int Econ 60:235–247, 2003) no longer obtains. Thus, fiscal rules as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact may work as monetary/fiscal coordination devices that improve welfare. The imposition of common targets, however, may work as a substitute for policy coordination only if these are made state contingent, an aspect that the recent version of the Stability and Growth Pact takes into account in a more appropriate way than its original version.

Alternative Fiscal Rules for the New EU Member States

The fiscal regime of new EU member states is dictated by the Stability and Growth Pact by virtue of EU membership and, for EMU candidates such as all new EU members are supposed to become soon, by the Maastricht Treaty. Such dual fiscal regime is somewhat perverse: Maastricht conditions in the year before EMU entry is assessed are significantly harder than SGP conditions before and after - a pointless hurdle. Most new members have fiscal difficulties: structural deficits, relatively low and mostly indirect taxation, widespread flat tax; failure to coordinate monetary and fiscal policy, and the fiscal shock of EU entry. The paper then discusses SGP criticisms and their relevance to CEE economies: neglect of the size of public debt, and of the share of public investment; failure to co-ordinate, within the Euro-area, both the fiscal policy of member countries, and the overall fiscal stance of the euro-area with ECB monetary policy; the inappropriateness of SGP rules to the principle of subsidiarity that shapes EU policy. The March 2005 reform has softened the SGP and considered some of these factors, but there is still considerable uncertainty in the EU authorities' discretionary powers, and Maastricht conditions remain rigid. The implications are likely delays in both fiscal consolidation and the introduction of the euro in many of the new eastern member states - unless they can get away with either cosmetic measures such as those pioneered by Italy and other member states, or unilateral euroisation - two options which are neither likely nor desirable. Recommendations include: 1) unification of fiscal deficit requirements of EU membership and EMU entry 2) formal non-discretionary modification of the fiscal deficit rules applicable to both EU and EMU in the directions of the March 2005 reform of SGP; 3) the relaxation of fiscal constraints for individual countries as long as the overall fiscal stance of the entire euroarea meets the criteria set for each country.

A COHESION PACT FOR THE REGIONS

The Lisbon Agenda of 2000 and the supporting Sapir and Kok Reports have set the parameters of economic policy in the European Union (EU) in the medium term. The asymmetric regime of economic governance locks manifold regions and industries into an inflexible and unbalanced policy environment so that the objectives of Lisbon may be difficult to achieve. The monetary straitjacket of the euro, buttressed by the Maastricht Treaty and the Stability and Growth Pact (SGP) fiscal conditions, limits the degree to which competitiveness and cohesion may be delivered, particularly in an expanded Union. This article explores these issues of economic governance in the EU in order to investigate the possibility of a ‘cohesion pact for the regions’ which places a more comprehensive industrial policy as the fulcrum for achieving a better balance between growth and cohesion. Operating within an Open Method of Coordination (OMC) framework and by linking industrial policy instruments to a system of fiscal federalism, a more flexible and balanced regime of economic governance may ensue, one in which the ambitious objectives of the Lisbon Agenda may start to be achieved or at least moved towards more efficaciously.