The coordination of fiscal
policy in the EU
Bucharest, 10 April 2008
Elena Flores, European Commission
INDEX OF PRESENTATION
1. Multilateral fiscal policy surveillance:
overview of the architecture
2. Fiscal policy-making in the EU: evolving
rules
3. How did it work? Challenges ahead
2
1. Multilateral fiscal policy surveillance:
overview of the architecture
• The rationale for sound public finances in EMU
• Why EMU-specific fiscal rules?
• The Maastricht fiscal rules
• The Stability and Growth Pact
3
The rationale for sound public finances in EMU
1. PRICE
STABILITY
Support ECB monetary policy
Lower interest rates
- Low interest payments
Longer time-horizon: more
private investment
2. SMOOTHING
THE CYCLE
No national monetary policy
 need for room to let
automatic stabilizers play
freely
3. STRUCTURAL
REFORM &
SUSTAINABILITY
Need for room to implement
reform that have a short term
cost for public finances; Cope
4
with the impact of ageing.
Why EMU-specific fiscal rules?
EMU unprecedented historical experiment
- monetary policy is centralised whilst fiscal policy is
decentralised (MS)
-EMU-specific fiscal rules are best seen as device to
‘protect’ an independent stability-oriented common
monetary policy against (possibly) destabilising
opportunistic national fiscal policies
5
The Maastricht fiscal rules: Treaty
• “Member States shall avoid excessive
government deficits” (Treaty Article 104)
– deficit below the reference value of 3% of
GDP, unless it has declined substantially
and continuously and reached a level close
to the reference value or the excess is
limited, exceptional and temporary
– debt should not exceed the reference
value of 60% of GDP, or should be on a
decreasing trend and approach the reference
6
value at a satisfactory pace
The SGP (2): preventive arm
•
•
•
Euro area Member States are obliged to annually
submit stability programmes to the Commission,
non-euro area Member States have to submit
convergence programmes
The medium-term budgetary position must ensure
a safety margin against breaching the 3% limit
The Council gives an early warning in case of
significant divergences of budgetary positions
from the medium-term budgetary objectives
(MTO’s) or the adjustment path towards them
7
The SGP (3): corrective arm
•
•
•
•
Tight timetable for the Excessive Deficit Procedure so as
to arrive at a speedy decision on the existence of an
excessive deficit
First steps on the decision on the existence of an ED
Following steps on the correction of an excessive deficit
-Art 104.7: recommendation to correct the ED
-Art 104.9: strengthened surveillance
Sanctions if the EDP does not lead to a deficit correction
8
2. Fiscal policy-making in the EU: evolving
rules
• Overview
• Positive aspects
• Difficulties
• Changing circumstances
• Reform of the Pact
9
Overview
1.
2.
Positive aspects
1. Anchoring budget deficits
2. Putting sustainability of public finances on top of the policy agenda
Difficulties
1. Medium-term budgetary objectives turned into moving targets
(overly optimistic forecasts; insufficient control of public spending)
2. SGP worked asymmetrically over the cycle (pro-cyclicality)
3.
3. Short-sightedness in the conduct of budgetary policy (one-offs)
4. Lack of political will (Early warnings not effective; events of Nov 2003)
5. Rising concerns about equal treatment among MS
Changing circumstances
1. Relation deficit and debt criterion weakened (stock-flow adjustment)
2. Increased economic heterogeneity in enlarged EU-25 made more difficult
“one-size-fits-all”
3. Ageing populations
10
Positive aspects: anchoring budget deficits
55
6
5
4
Expenditure
% of GDP
3
45
Deficit
2
1
Revenues
40
GDP growth rate
50
0
Growth rate
-1
35
-2
70 972 974 976 978 980 982 984 986 988 990 992 994 996 998 000 002 004 006
19
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
11
Positive aspects: increase in debt levels
stopped
80
EUR-12
debt ratio, as a % of GDP
70
60
EUR-15
50
40
30
20
1970
1975
1980
1985
1990
1995
2000
2005
12
Difficulties: MTO’s became moving targets
1
4th
3rd
0
2th
-1
5th
-2
6th
1st vintage
-3
Projections
Actual
-4
-5
-6
-7
1990
1992
1994
1996
1998
2000
2002
2004
2006
13
Difficulties: lack of consolidation in good
times
3
9
9
8
Number of MS
with a deficit >3% (rhs)
2
5
3
1
3
3
1
6
5
3
3
1
0
0
Output Gap (lhs)
-1
-2
-3
Cyclically-adjusted balance (lhs)
Fiscal consolidation
in bad times
-6
-3
-9
Bad times,
timid consolidation
No consolidation in
good times
-4
-12
14
-5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-15
Difficulties: short-sightedness in the
conduct of fiscal policy
3
One-off measures
2
1
as % of GDP
0
Cyclically-adjusted balance
-1
General government balance
-2
-3
-4
-5
-6
Cyclically-adjusted balance net of one-offs measures
-7
1999
2000
2001
2002
2003
2004
2005
15
Changing circumstances
– Relation deficit and debt criterion weakened
(stock-flow adjustment)
– Enlargement - EU-25
– Ageing populations
=> Enriched common framework with stronger
rationale and more focus on sustainability and
debt
16
Changing circumstances:
Heterogeneity
Average potential growth, in nominal terms 2000-2005
14%
12%
HUN
LV
IE
10%
EE
SI
SK
8%
SP
EL
LUX
CY
LT
6%
UK
CZ
POL
PT
NL
IT
MT
FR
4%
UE-25
BE
FIN
SW
EUR-12
2%
DK
AT1
GE
0%
0
50
100
150
200
Gross domestic product at current market prices per head of population (% EU average)17
250
Reform of the Pact
• Reform of the Pact: preventive arm
• Reform of the Pact: corrective arm
• Reform of the Pact: evaluation
18
Reform of the Pact: preventive arm
In November 2003, conflict Council/Commission about the SGP: a
reform process was launched in 2004, agreement in March 2005,
enacted in Council regulations in July 2005
New Council Regulation: 1055/2005 amending Regulation (EC) No 1466/97
•
Differentiated medium-term budgetary objectives according to
MS specificities (debt, potential growth, implicit liabilities)
•
Annual structural adjustment of 0.5% GDP as a benchmark
•
Larger efforts required in ‘good times’
•
New incentives for structural reforms (deviation permitted)
•
Direct “early policy advice” by Commission
19
Reform of the Pact: preventive arm
•
SGP complemented by national budgetary rules and institutions
•
Need to base budgetary projections on realistic macroeconomic
forecast
•
SCP for the legislature
•
National Parliaments increased role (discuss SCP and Council
opinions, follow up recommendations to EW and EDP)
20
Reform of the Pact: corrective arm
New Council Regulation: 1056/2005 amending Regulation (EC) No 1467/97
•
Always a report Art 104(3) when deficit exceeds 3%,
•
No expenditure item excluded, as demanded by some MS
•
Clarification of nature and role of ‘Other Relevant Factors’ (which are
taken into account only if the deficit close to the reference value and if the excess is
temporary)
•
Minimum fiscal effort required for MS under EDP of ½ % of GDP
irrespective of other relevant factors
•
Possibility of extended deadline for correction of excessive deficit
to better reflect economic situation
•
Modifications of exceptional circumstance (“severe economic
downturn”) when growth is negative
•
Possibility to repeat steps in the EDP in case of unexpected adverse
21
events
Reform of the Pact: evaluation
1. A rules-based system was preserved
1.
2.
3.
3% and 60 % remain the nominal anchors
No re-definition of the budget deficit
Exceptions granted from 3 % ceiling only if the deficit remains close to
the reference value and excess is temporary
2. Removed incentives for time-inconsitent policies and
short-sightedness of fiscal policy
1.
One-off and temporary measures not included in fiscal effort
3. Stronger economic underpinnings
1.
2.
3.
4.
5.
Allowing for country-specific elements in setting MTOs and in adjustment
path to MTO
Incentives for fiscal consolidation in good times
Linking structural reforms with fiscal policy
Economic elements taken into account in deciding on existence of
excessive deficits and in setting deadlines for their correction
22
Obligation of fiscal efforts in the EDP
3. How did it work? Challenges ahead
Data taken into account by the Council when deciding on the existence of an excessive deficit
2004
2005
2006
3.1% of GDP
3.6% of GDP
4.6% of GDP
IT
Conclusions
Close, not temporary
(observed)
(COM spring-05 forecast)
(COM spring-05 forecast)
2.9% of GDP
6.2% of GDP
4.8% of GDP
PT
Not close, not temporary
(observed)
(Plans of the Portuguese authorities)
(Plans of the Portuguese authorities)
3.2% of GDP
Just below 3½% of GDP
Around 3.1% of GDP
UK
Close, not temporary
(observed)
(COM autumn-05 forecast) (COM autumn-05 forecast)
23
3. How did it work? Challenges ahead
104(7) rec.
under the
original
SGP to EU15 Member
States
104(7) rec.
under the
revised SGP
Indentification
(= year t)
Deadline
for the
correction
GE
2003
2004 (t+1)
FR
2003
2004 (t+1) > 0% of GDP
NL
2004
2005 (t+1) 0.6 % of GDP
GR
2004
2005 (t+1)
IT
2005
2007 (t+2) > 0% of GDP
PT-II
2005
2008 (t+3)
Package of
0.6% of GDP
UK
2006 (fiscal
year)
2006 (t)
0,5% structural
Effort in t Effort in t+1 Effort in t+2 Effort in t+3
1.0% of GDP of structural
measures
Yearly
average
-
-
0.5% of GDP
at least 0.5% of
GDP
-
-
0.3% of GDP
at least 0.5% of
GDP
-
-
0.5% of GDP
Structural measures of at least 1%
of GDP over the 2 years
-
Change in the structural balance of
at least 1.6% of GDP cumulated
0.5% of GDP
-
0.6% of GDP
1.5% structural 0.75% structural 0.75% structural 0.9% of GDP
-
-
-
0,5% of GDP
24
3. How did it work? Challenges ahead
• Still a long way to go to reach the MTO
• Not sufficient consolidation in good times
• Better integrate medium and long tem fiscal
challenges
• Improve efficiency of national fiscal rules
25
3. How did it work? Challenges ahead
Average primary CAB over the period 1990-2005,
as a percentage of GDP
4
3,5
Share of government finances covered by
numerical fiscal rules and primary cyclicallyadjusted primary balance
Very high
coverage
by fiscal rules
3
2,5
2
Low
coverage
by fiscal
rules
1,5
1
0,5
High
coverage
by fiscal
rules
Very low
coverage
by fiscal
rules
0
26
Reference material
• Economic and Monetary Union: Legal and Political Texts
-edited jointly by the Commission and by the General Secretariat of the
Council of the EU (2007)
-Link:
http://bookshop.europa.eu/eubookshop/FileCache/PUBPDF/QC7606262E
NC/QC7606262ENC_002.pdf
Public Finance in EMU, link:
http://ec.europa.eu/economy_finance/publications/publicfinance_en.htm
• Fiscal Policy Surveillance in Europe
-edited by Peter Wierts, Servaas Deroose, Elena Flores and Alessandro
Turrini (2006)
27