Growth Pact Research Articles

Government debt, European Institutions and fiscal rules: a synthetic control approach

Public debt and its development are key questions of public sector economics and fiscal policy. This paper uses the Synthetic Control Method to study how different large-scale steps of European integration and the establishment of the EU fiscal framework have affected government debt in EU Member States. The results point to a notable debt-restricting effect of EU membership and the introduction of the Stability and Growth Pact for a large majority of the studied country groupings as well as for individual countries. Outside of a few individual countries, the actual government debt levels are substantially lower than in the synthetic alternatives.

Government debt: the impact of fiscal rules at the European and national level

As Europe and the world surface from the pandemic of 2020–2021, public debt levels have risen substantially, the review of the European Union (EU) economic governance framework is underway and the general escape clause of the stability and growth pact (SGP) is planned to be deactivated at the end of 2023. Against this background, it is important to better understand the dynamics of public debt in the EU. This paper studies how European institutions and sectoral national fiscal rules have affected the formation of public debt. The results suggest that over the last 25 years, the SGP has been an effective tool for lowering government debt levels, at least on average. The establishment of the SGP has been the most effective at lowering government debt, while reforms of the SGP have only had limited effects. The effects of national fiscal rules are heterogenous across different rules and public sector classifications, but it seems that national fiscal rules have at least some effects beyond the SGP in all studied cases. This implies that the EU fiscal framework and EU-level fiscal policies should take into account potential interactions with national fiscal rules and both can be used to increase the effectiveness of fiscal policymaking.

The Macroeconomic and Social imbalances in the Eurozone in the period of Economic Crisis (2008 - 2014)

This paper attempts to shed light on the economic and social effects of the economic crisis among Member States of the Eurozone in the period 2008-2014 emphasizing the imperative revision of the framework of the Stability and Growth Pact. Particular emphasis is given to the growing Macroeconomic and Social imbalances between Euro (€) North and Euro (€) South, which had posed a threat to the economic viability and social cohesion in the Eurozone.
 
 JEL Classification: D63, E02, E60, E62, H30
 Key words: Eurozone crisis, Economic Inequality, Macroeconomic Imbalances, Social Imbalances, Stability and Growth Pact

Fiscal Compliance and Fiscal Response to the COVID-19 Crisis in Visegrad and Baltic States

The coronavirus crisis, which began in 2020, had a major impact on the fiscal policies of the EU member states. Governments increased their spending to support economies affected by quarantine measures. Expenditure increase and revenue reduction made EU countries non-compliant with the requirements set by the Stability and Growth Pact, adopted to balance fiscal policies. However, countries were affected differently and used different fiscal measures. The paper discusses differences in fiscal response to the COVID-19 crisis among Baltic and Visegrad countries. The paper aims to analyse how the fiscal response in 2020 correlates with their fiscal indicator's compliance in the pre-crisis period (2004-2019). The results suggest that the states could be divided into two subgroups according to their fiscal stance before 2020 and their reactions to the shock. The first group, consisting of Hungary, Poland, and Slovakia, represent states with a higher level of public debt, lower compliance with the debt and deficit rules, and higher expenditures. Hungary stands out among the states, while Estonia and the Czech Republic have the best compliance scores.

Оновлення системи фіскальних правил в Європейському Союзі та перспективні напрями їх реформування в Україні

Introduction. In 2022 and 2023 fiscal rules in Ukraine were suspended by amendments to the Budget Code, although after the end of war the negotiation process with the EU on its enlargement will put the issue of resumption of the fiscal rules in Ukraine and their alignment with the EU norms on the economic reforms’ agenda in Ukraine. Problem Statement. Restoration of the system of fiscal rules in Ukraine and its new substantive filling on the way of Ukraine’s preparation for the EU accession taking into account the experience of implementation of the supra-national fiscal rules in the EU and challenges for the reforms of the budgetary framework in the EU member states. Purpose – drawing lessons of functioning of the numerical fiscal rules in the EU, reviewing the components of transformation of the budgetary framework and mechanisms of the fiscal policy surveillance from the side of the EU supra-national bodies and eventually, on their basis, specifying the core directions of reforming fiscal rules in Ukraine for their approximation to the EU standards. Methods. General scientific and special methods are applied: analysis and synthesis, description and comparison, historical method, method of theoretical generalization and abstract-logical method. Results. The article highlights the essence of fiscal rules as important constituents of modern fiscal institutions, shows the quantitative indicators of extension of the fiscal rules across the world and their common combinations. It reveals the main trends in modification of the fiscal rules and validation of the escape clauses in the course of corona-crisis. The author summarizes the mechanisms of budget deficit regulation, containment of public expenditure growth and limiting public debt level in the EU member states with a focus on the provisions of the Stability and Growth Pact and of the EU Regulations, which specify the tools of application of the Pact and Treaty on the Functioning of the European Union. The author synthetizes the key dimensions of current transformation of the EU fiscal rules with an emphasize on the instruments of fiscal policy surveillance in the EU member states and targeting fiscal policy at achieving green and digital transition by their economies with simultaneous debt sustainability goal. Policy proposals are devised for upgrading the system of fiscal rules in Ukraine and their validation after finishing the war. Conclusions. Incorporation of debt limit and budget balance ceiling across the sector of general government into the budgetary legislation of Ukraine, as well as of net primary expenditure rule aimed at restoration of the debt sustainability, as well as mechanisms of implementation of the fiscal rules and independent monitoring of the fiscal rules observance in line with the EU standards (over the medium run) would contribute to securing macro-financial stability in Ukraine and accelerate the economic and political integration of Ukraine with the EU.

Solidarische Tilgung der Staatsschulden im Euroraum

Abstract There is no getting around a reform of the European Stability and Growth Pact. However, there is no reform model under discussion that can be expected to enforce compliance with public budget discipline more effectively than before. With this in mind, this paper argues in favour of shifting the competence to impose sanctions in the event of non-compliant behaviour from the community level to the intergovernmental level. This would increase the credibility of the sanction threat. The shift would not mean abandoning the previously introduced fiscal rules.

THE MACROECONOMIC EFFECTS OF RE-APPLYING THE EU FISCAL RULES: RETURNING TO THE STATUS QUO ANTE OR MOVING TO EXPENDITURE RULES?

AbstractAgainst the background of the European Commission’s reform plans of the Stability and Growth Pact, this paper uses NiGEM to simulate the macroeconomic implications of re-applying the fiscal rules in 2024. Next to returning to the unreformed rules, the most prominent options include an expenditure rule. Our results indicate that re-applying the unreformed rules leads to severe cuts in public spending. An expenditure rule would, however, not necessarily alleviate the fiscal adjustment burden. Instead, our simulations show that great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way.

Numerical Compliance with EU Fiscal Rules: Facts and Figures from a New Database

Abstract EU fiscal rules are meant to keep public finances on a sustainable path. This paper presents a new database that tracks numerical compliance with the four main rules of the Stability and Growth Pact starting in 1998. Our assessment of numerical compliance abstracts from the many exceptions and elements of discretion allowed by the letter and the spirit of EU law. It focuses on the main course of action implied by the rules. Overall, our database points to a very mixed compliance record. On average – across countries, years and rules – budgetary policies of the EU member states are compliant in just over half of the cases with stark and persistent differences across countries. We also detect a distinct cyclical pattern of compliance, which sends false signals of safety in good times.

COVID-19 Pandemic and Measures Implemented at the Level of European States

The COVID-19 pandemic resulting from the SARS-CoV-2 virus spread in a very short time globally, bringing significant consequences to the health of millions of people. At the same time, the pandemic had a strong impact on the global economy by increasing government spending and declining tax revenues that led to worsening macroeconomic indicators and subsequently, the emergence of a new period of recession. In order to support the economy, public authorities have developed and implemented a series of measures and policies that will gradually lead to the improvement of the global economic context and the recovery of the economy in the shortest possible time. Moreover, at the level of the European Union, the authorities were more involved than ever by implementing a new intervention instrument entitled "Next generation EU" through which funds were allocated to European states, and at the same time, it was decided to activate the derogation clause. The Stability and Growth Pact, according to which European states can deviate from the criteria specified in the founding treaties of the European Union, refer to the level of the budget deficit, respectively of government debt as a percentage of gross domestic product. The motivation for choosing this topic is on the one hand the negative impact that this phenomenon has generalized at all socio-political and economic levels, as well as the topicality of the topic debated in contemporary scientific research.

Stability and Growth Pact: Too Young to Die, Too Old to Rock ‘n’ Roll

This paper discusses the future of the Stability and Growth Pact (hereafter SGP). Although Neoclassical economic models argue that strict fiscal and monetary rules minimize moral hazard and crowding out, in practice many governments adopt fiscal expansion (in recent years in the form of non-standard monetary measures) to mitigate market failures, consequently rethinking monetary rules and targets. Government spending and countercyclical policies are essential tools for soothing business cycles and other market failures. To this end, we empirically test whether current and past forms of the SGP have led to greater convergence, while we critically assess and investigate a possible SGP reform. By adopting more flexible rules, in terms of government spending and fiscal expansion, the Economic and Monetary Union (hereafter EMU) could yield multiple positive spillover effects in long-term economic growth under specific terms and conditions, such as green conditionalities. We conclude that to mitigate the triple crisis threat (economic, environmental and health), what is mostly needed are reforms in the form of fiscal federalism, such as common debt issuance (Eurobonds) that enhance the ability of the EMU to tackle the consequences of the aforementioned crises.

The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach

This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level and the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) a threshold (ceiling) of public debt to ensure fiscal sustainability, (ii) sustainable paces of these consolidations, and (iii) the optimal pace of consolidations under both expenditure- and tax-based consolidations, examining whether these consolidations are effective in the sense that they are sustainable, increase welfare, and induce fairness of welfare distribution across generations (lower intergenerational conflicts over welfare). We find that the pace of tax-based consolidation required to ensure fiscal sustainability is higher than that required for expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation, which depends on the size of outstanding debts relative to capital, the economy’s productivity, tax rate levels, and the extent of utility derived by individuals from public goods and services. More importantly, it may also depend on whether policymakers emphasize social welfare or fairness of welfare distribution between generations. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that fiscal consolidation cannot persist much longer than 30 years (one period in the model). This result will support the pace of consolidation in the EU: the Stability and Growth Pact.

How Fiscal Rules Matter for Successful Fiscal Consolidations: New Evidence

Abstract Fiscal rules are increasingly promoted by international organizations. We investigate whether fiscal rules are effective in achieving sustained debt reduction during periods of fiscal consolidation using data from 19 OECD countries. The analysis is based on an extended version of the International Monetary Fund’s fiscal rules database. Fiscal consolidation periods are identified using a novel method that takes differences in the variability of fiscal balances into account. We find: (i) the EU’s Stability and Growth Pact is associated with sustained debt reduction while it is more doubtful if the mere existence of national fiscal rules has an effect. (ii) Fiscal rules have a stronger association with sustained debt reduction when they are embedded in a stricter national institutional framework (JEL codes: H6).

Sustainability gap of public debt: importance of interest rates and a new decomposition with premia

Sustainability gaps (S2 indicators) are frequently used in national and international reports to assess the sustainability of public finances. For instance, in the European Commission’s Debt Sustainability Monitor (DSM) the indicators are analyzed in comparisons across (policy) scenarios, countries and time. The report’s findings play a crucial role in the context of the Stability and Growth Pact and the European Semester. As a result, sustainability gaps have a significant indirect influence on policy decisions. In this paper, we analyze two non-transparent properties of these indicators. First, the response of these indicators to changes in the interest rate-growth (r-g) differential is not readily predictable in terms of both strength and direction. Second, in our examples for low values of r-g (in a range of 0.5%), highly uncertain projections for distant periods after 2070 explain about 80% of the indicators’ values. To address these problems, we develop a new decomposition that takes into account the notion of premia (Reis 2021) and hence allows for a more transparent discussion of the sustainability of public debt.

New Constitutionalism and the EU: Its Limits and Prospects beyond the COVID-19 Pandemic

A key question for today is how far the apparent loosening of austerity following the COVID-19 pandemic in the form of the July 2020 European Recovery Plan of 750 billion euros, constitutes a first step towards debt mutualization (sharing of debts to fund recovery among EU Member States) but also whether it signals a move away from the neoliberal legal and political limits associated with neoliberal new constitutionalism measures, epitomized in the EU by the Maastricht Treaty and the Stability and Growth Pact. We think this prospect is unlikely – in the absence of significant political pressures demanding and creating alternative futures and promoting radical change. In lieu of paradigmatic change, Next Generation EU resembles a pragmatic shift – with indeed some innovative traits – triggered by two main motives: responding to the urgent pandemic shock, but most importantly tackling the lasting effects of economic and political imbalances, in an attempt to tame some of the socio-political tensions and risks of disintegration resulting from the mismanaged Eurozone crisis.

Effectiveness and counter‐cyclicality of fiscal consolidation under compliance regulation: The case of the Stability and Growth Pact

AbstractIn this study we examine the impact of the European Stability and Growth Pact (SGP) on narratively identified fiscal adjustments whose prime focus is to reduce the budget deficit and compare the effects with those on the primary and the structural budget balance. The cross section of EU and non‐EU economies and the sample period 1980–2014 allow for an assessment of the SGP regarding its effectiveness, cyclicality, and the type of fiscal adjustments (tax hikes vs. spending cuts) as compared with counterfactual scenarios. Our findings indicate that the SGP has effectively boosted budget consolidation measures identified by means of the narrative approach, whereas it had no overall impact on the primary and an overall minor impact on the structural budget balance. However, the effectiveness of the SGP has varied considerably over time. All measures indicate that the SGP was particularly effective in the period after the introduction of the Euro, except for the 2 years following the financial crisis in 2008. We find no evidence that fiscal policy has become more procyclical under the SGP. Finally, fiscal consolidation under the SGP favors spending cuts, whereas the application of tax hikes shows no sizeable differences as compared with the reference group.

EU fiscal governance and the managerial reformatting of neoliberal constitutionalism

This article analyses the EU’s Stability and Growth Pact (SGP) to challenge interpretations of neoliberalism as an international project. The fiscal rules of the SGP are a paradigmatic example of how neoliberalism uses constitutional techniques to put limits on national democracy. These rules, however, have never worked as intended with adherence having been the exception rather than the norm. Although scholars readily admit neoliberal rules misfire in practice, conceptualisations of neoliberalism have remained largely unscathed. In contrast, this article argues that techniques of budgetary planning have had a more crucial impact on neoliberal fiscal governance than legal rules. In the case of the SGP, supranational actors have been empowered not by their capacity to put constitutional limits on public expenditure, but by analysing and intervening in the purposes and uses of public finance through managerial techniques of budgetary planning. In making this argument, I argue that neoliberal rules matter to international fiscal governance only through their failure. Instead, supranational institutions have been empowered in the neoliberal era through a managerial reformatting of governance.

The Euro Area Periphery Debt Conundrum

There are many reasons to reform the Stability and Growth Pact, but that reform is no panacea. This is because the euro area periphery has increasingly entered a debt conundrum.

Numerical rules or political government, that is the (European) question

Numerical rules can be defined as legal rules, the operative part of which is an economic indicator. This peculiar recombination of the technologies of government through law and governance by numbers is the result of the return of the regulatory ideal of neutral government in the 1970s (powered by the amalgamation of ordoliberal and neoliberal ideas into what may be called neo-ordo-liberalism) and the search for solutions to the contradiction at the heart of European integration after 1971: the will to have a common currency without the will and institutional means to ensure its political government. The ground for the emergence of European numerical rules was laid by the establishment of the European Monetary System in the late 1970s, which resulted in the subjection of national monetary policy (and to a lesser extent, national fiscal policy) to relevant economic constraints. European numerical rules were codified and thus juridified in the Maastricht Treaty, concretised in the Stability and Growth Pact, and retooled in the wake of the financial, economic and fiscal crises of the 2010s. Cumulated experience confirms that the elimination of discretion in the process of application of numerical rules is an illusion. In fact, resort to economic indicators to define the operative part of legal rules does not do away with discretion, but merely changes the way in which discretion is exerted. This is so because economic indicators are not sources of objective and impartial economic knowledge, but social constructs, open indeed to be articulated in different forms. The curious case of the structural deficit as defined in the Stability and Growth Pact illustrates the point quite vividly. The need to resort to discretion in the process of application of numerical rules should be explicitly acknowledged instead of denied. Otherwise, the result will be the cloaking of discretionallty, which breeds arbitrariness.

The eurozone: What is to be done to maintain macro and financial stability?

The financial stability of the eurozone depends on its macroeconomic stability and vice versa. We construct a macro DSGE model of the eurozone and its two main regions, the North and the South, with the aim of matching the macro facts of these economies by indirect inference and using the resulting empirically-based model to assess possible new policy regimes that could maintain financial stability. The model we have found to fit the facts suggests that substantial gains in stability and consumer welfare are possible if the fiscal authority in each region is given the freedom to respond to its own economic situation. Further gains could come with the restoration of monetary independence to the two regions, in effect creating a second ‘southern euro’ bloc. Enhanced fiscal flexibility increases fluctuations in debt and deficit ratios to GDP while keeping average ratios stable, maintaining solvency. A reformed Stability and Growth Pact could be limited to monitoring solvency.

FISCAL POLICY AND LONG-TERM ECONOMIC GROWTH: LESSONS FROM THE EURO AREA

At the beginning of 2020, the European Union embarked on a process of reviewing its macroeconomic policy strategy and economic governance framework. While the review of the monetary policy framework was approved in July 2021, the review of the fiscal policy framework was put on hold as a result of the outbreak of the covid-19 pandemic and the ensuing economic crisis. The Covid-19 crisis led to a breach of fiscal rules in the European Union and an unprecedented increase in the size of fiscal imbalances. In this context, there is a need for a radical reform of the fiscal rules still in force to allow for a more active role of national fiscal policies and to avoid the serious economic problems resulting from the fiscal austerity policies emanating from the Maastricht Treaty, the Stability and Growth Pact and the successive reforms of the latter.