The coordination of fiscal policy in the EU

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• The coordination of fiscal policy in the EU
• Bucharest, 10 April 2008
• Elena Flores, European Commission

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INDEX OF PRESENTATION

• Multilateral fiscal policy surveillance overview
  of the architecture
• Fiscal policy-making in the EU evolving rules
• How did it work? Challenges ahead

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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

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The rationale for sound public finances in EMU
Support ECB monetary policy Lower interest rates
- Low interest payments Longer time-horizon more
private investment
1. PRICE STABILITY
No national monetary policy ? need for room to
let automatic stabilizers play freely
2. SMOOTHING THE CYCLE
Need for room to implement reform that have a
short term cost for public finances Cope with
the impact of ageing.
3. STRUCTURAL REFORM SUSTAINABILITY
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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

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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 value at a satisfactory
  pace

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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 (MTOs)
  or the adjustment path towards them

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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

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2. Fiscal policy-making in the EU evolving rules

• Overview
• Positive aspects
• Difficulties
• Changing circumstances
• Reform of the Pact

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Overview

• Positive aspects
• Anchoring budget deficits
• Putting sustainability of public finances on top
  of the policy agenda
• Difficulties
• Medium-term budgetary objectives turned into
  moving targets(overly optimistic forecasts
  insufficient control of public spending)
• SGP worked asymmetrically over the cycle
  (pro-cyclicality)
• Short-sightedness in the conduct of budgetary
  policy (one-offs)
• Lack of political will (Early warnings not
  effective events of Nov 2003)
• Rising concerns about equal treatment among MS
• Changing circumstances
• Relation deficit and debt criterion weakened
  (stock-flow adjustment)
• Increased economic heterogeneity in enlarged
  EU-25 made more difficult one-size-fits-all
• Ageing populations

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Positive aspects anchoring budget deficits
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Positive aspects increase in debt levels stopped
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Difficulties MTOs became moving targets
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Difficulties lack of consolidation in good times
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Difficulties short-sightedness in the conduct of
fiscal policy
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Changing circumstances

• Relation deficit and debt criterion weakened
  (stock-flow adjustment)
• Enlargement - EU-25
• Ageing populations
• gt Enriched common framework with stronger
  rationale and more focus on sustainability and
  debt

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Changing circumstancesHeterogeneity
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Reform of the Pact

• Reform of the Pact preventive arm
• Reform of the Pact corrective arm
• Reform of the Pact evaluation

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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

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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)

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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 events

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Reform of the Pact evaluation

• A rules-based system was preserved
• 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
• Removed incentives for time-inconsitent policies
  and short-sightedness of fiscal policy
• One-off and temporary measures not included in
  fiscal effort
• Stronger economic underpinnings
• 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
• Obligation of fiscal efforts in the EDP

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3. How did it work? Challenges ahead
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3. How did it work? Challenges ahead
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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

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3. How did it work? Challenges ahead
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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/F
  ileCache/PUBPDF/QC7606262ENC/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)