Download EMU Governance System

What is the rationale for
EMU Governance and
Economic Coordination
Presented by Daniel Gros
Public Hearing on Institutional Aspects of the New Rules on
Economic Governance and the Role of the EUROGROUP
European Parliament, May 5
Centre for European Policy Studies • www.ceps.eu
Outline
• The EMU governance system
• Economic policy coordination and
spillovers
• Conclusions
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EMU Governance System (I)
• Rule-based system with complex procedures.
• A complex set of rules:
– Six-pack
European Semester
– Two-pack
– (The forgotten) Treaty on Stability, Coordination and Governance
• For the EA MS but also the other EU countries
• Different actors, competences and degrees of accountability
• Overall aim of recent changes: strengthen economic
coordination and surveillance (EC document 2010)
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EMU Governance System (II)
“The crisis exposed fundamental problems
and unsustainable trends in many European
countries. It also made clear just how
interdependent the EU's economies are.
Greater economic policy coordination across
the EU will help us to address these problems
and boost growth and job creation in future”.
European Commission
http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/priorities/economicgovernance/index_en.htm
=> No crisis no interdependence?
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A representation of EMU economic governance
EU constraints on national economic
policies
High
Low
Adjustment
programmes
under ESM
Enhanced
surveillance of MS
under financial
stress
EDP and MIP for
excessive deficits
and imbalances
Coordination and
surveillance of
fiscal and
macroeconomic
policies
Low
Risk & size of spillover effects
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High
Two fundamental assumptions of
the governance system
• Major threats to systemic stability arise
from fiscal imbalances (EDP) and
external and financial ones (MIP)
• Rules to limit risks, and economic policy
coordination to face spillovers
• Our focus: spillovers.
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Two fundamental criticisms
• In terms of crisis, the external position
of a country might be as important as
the fiscal position.
• Justification for coordination is the
existence of spillover effects.
• Do we know they work?
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Spillover effects in a Monetary
Union (I)
• The economic rationale for policy
coordination (and ‘corrective action’) is that
idiosyncratic shocks in one country impact
demand/employment in other countries and
the entire union.
• What do we know about spillovers?
– They differ according to the state of the economy
– Depend of fiscal/external position of the country
– Depend on the stability of the financial system
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Spillover effects in a Monetary
Union (II)
• Different shocks need to be
considered:
• Fiscal policy (deficit spending)
• Growth policy (increase in
productivity)
• (not policy): level of public debt
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Spillover effects in a Monetary Union
Relevant
Variable
State of the
Economy
Sovereign Fiscal
Debt
policy
(high
(deficit up)
debt)
Growth:
Productivit
y
enhancing
Normal times
no
?
?
Zero interest rate
no
+
?
---
--
++
(policy rate)
Crisis times:
High risk premia
Relevant
Variable
Regime:
Normal times
• Assumption:
Growth
Sovereig
n Debt
Budget
balanc
e
no
+
-?
---
--
++
State of the
Economy
Zero interest rate
Crisis times:
– No confidence problems High risk premia
– Debt level irrelevant within certain limits
– No ZLB problem
• Higher deficit has two effects: demand
increases and interest rates increases
=> net spillover effect uncertain
• Effect of higher productivity on other
countries also uncertain (Investment,
competitiveness and L-mkt channels)
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Sovereign
Debt
Budget
balanc
e
Growth
Normal times
no
?
?
Crisis times:
---
--
++
Relevant
Variable
Regime:
Zero interest rate
State of the
Economy
• Debt level irrelevant
• Fiscal deficit:
High risk
premia
– Positive spillover: demand channel
dominates
• Effect of higher productivity on rest of
union: competitiveness channels might
dominate with sluggish wages
Negative spillover effect from structural
reforms?
Centre for European Policy Studies • www.ceps.eu
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Relevant
Variable
Regim:
Crisis times
Sovereign
Debt
Budget
balance
Growth
State of the
Economy
Normal times
no
?
?
Zero interest
no
+
?
rate
• High risk premia
• Debt matters
• Deficit: Confidence effect potentially important =>
spillover strongly negative
BUT
• opposite policy may also have short run negative
effect on debt ratio: self-defeating austerity?
• Productivity positive spillover because of
confidence
• Overall the size of spillovers depends of the
resilience of financial system
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Conclusions
• Complex system of rules
• Rules remain the fundamental pillar of
the system
– Questioning them = questioning EMU
• Economic rationale for coordination may
lack robustness
• Clarify what coordination is
• The perception that Brussels knows
what is best is hard to accept if the
approach imposed does not deliver
(output legitimacy)
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Thank you!
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