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Theorie und Politik der
Europäischen Integration
Theory and Politics of
European Integration
Lecture 13
The European Monetary Union (EMU) and
the Fiscal Policy and Stability Pact
Prof. Dr. Herbert Brücker
Theory and Politics of European Integration
Last Lecture
•
Optimum Currency Area (OCA) Theory
· Asymmetric shocks
•
Criteria of on OCA
·
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Openness
Diversification
Labour mobility
Fiscal transfers
Homogenous preferences
Solidarity vs. nationalism
Is Europe an OCA?
Will Europe become an OCA?
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·
·
·
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Effects of a currency union on trade
On trade specialisation
Labour markets
Fiscal transfers
Beyond OCA criteria: politics
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
This lecture
The European Monetary Union (EMU)
• The Maastricht Treaty and convergence criteria
• The Eurosystem
·
·
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Objectives
Instruments
Strategy
Taylor’s rule interpretation
• Does one size fits all?
• Independence and accountability
The Fiscal Policy and Stability Pact
• Fiscal policy in a monetary union
• Fiscal policy spill-overs
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The long road to Maastricht and to the euro
The EMU Timetable
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Maastricht Treaty
•
A firm commitment to launch the single
currency by January 1999 at the latest
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A list of five criteria for admission to the
monetary union
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A precise specification of central banking
institutions
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Additional conditions mentioned (e.g. the
excessive deficit procedure)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Maastricht convergence criteria
Inflation
•
Not to exceed by more than 1.5% the average of the three
lowest rates among EU countries
Long-term interest rate
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Not to exceed by more than 2% the average interest rate in
the three lowest inflation countries
ERM membership
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At least two years in ERM without being forced to devalue
Budget deficit
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Deficit less than 3% of GDP
Public debt
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Debt less than 60% of GDP
· Note: observed on 1997 performance for decision in 1998
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of the convergence criteria: inflation
• Straightforward fear of allowing in unrepentant inflation-prone
countries
10.00
5.00
0.00
1991
1992
1993
France
Spain
Belgium
Greece
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
1994
1995
1996
1997
1998
Italy
Germany
Portugal
average of three lowest + 1.5%
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: long-term interest rate
• A little bit too easy to bring inflation down in 1997
– artificially or not – and then let go again
• Long interest rates incorporate bond markets
expectations of long term inflation
• So criterion requires convincing markets
• Problem: self-fulfilling prophecy
• If markets believe admission to euro area, they expect
low inflation and long term interest rate is low, which
fulfils the admission criterion
• Conversely, if not …
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: ERM membership
• Same logic as the long-term interest rate: need to
convince the exchange markets
• Same aspect of self-fulfilling prophecy
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: budget deficit and debt
• Historically, all big inflation episodes born out of
runaway public deficits and debts
• Hence requirement that house is put in order
before admission
• How are the ceilings chosen?
• Deficit: the German golden rule
• Debt: the 1991 EU average
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: budget deficit and debt
• Problem No.1: a few years of budgetary discipline
do not guarantee long-term discipline
• The excessive deficit procedure will look to that once in
euro area, more later
• Problem No.2: artificial ceilings
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The debt and deficit criteria in 1997
Maastricht fiscal criteria 1997
120
Public Debt (%GDP)
100
80
60
40
20
0
-3
-2
-1
0
1
Deficit (% GDP)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
2
3
4
5
Theory and Politics of European Integration
The European Monetary System
A tour of the acronyms
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N countries with N National Central Banks (NCBs) that
continue operating but with no monetary policy function
A new central bank at the centre: the European Central
Bank (ECB)
The European System of Central Banks (ESCB): the ECB
and all EU NCBs (N=15)
The Eurosystem: the ECB and the NCBs of euro area
member countries (N=12)
The Governing Council: All participating NBCs + 6
members of Executive Board (i.e. 12+6)
The General Council: Governing Council + nonparticipating NBCs (no decision-making competence)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The system
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
How does the Eurosystem operates?
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•
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Objectives
What it is trying to achieve?
Instruments
What are the means available?
Strategy
How is the system formulating its actions?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Objectives (1)
• The Maastricht Treaty’s Art.105
“The primary objective of the ESCB shall be to maintain price
stability. Without prejudice to the objective of price stability, the
ESCB shall support the general economic policies in the Community
with a view to contributing to the achievement of the objectives of
the Community as laid down in Article 2.”
• In clear:
• Fighting inflation is the absolute priority
• Supporting growth and employment comes next
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Objectives (2)
• Making the inflation objective operational: does
the Eurosystem have an inflation target?
• No, it has a definition of price stability:
"Price stability is defined as a year-on-year increase in the
Harmonised Index of Consumer Prices (HICP) for the euro area of
below 2%. Price stability is to be maintained over the medium
term."
“The Governing Council agreed that in the pursuit of price stability
it will aim to maintain inflation rates close to 2% over the medium
term.”
• Leaves room for interpretation:
• Where below 2%
• What is the medium term?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Instruments (1)
• Remember the channels of monetary policy
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Longer run interest rates
Credit
Asset prices
Exchange rate
• These are all beyond central bank control
• Instead it can control the very short term interest
rate: European Over Night Index Average (EONIA)
• EONIA affects the channels through market
expectations
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Instruments (2)
• The Eurosystem controls EONIA by establishing a
ceiling, a floor and steering the market in-between
• The floor: the rate at which the Eurosystem
accepts deposits (the deposit facility)
• The ceiling: the rate at which the Eurosystem
stands ready to lend to banks (the marginal
lending facility)
• In-between: weekly auctions (main refinancing
facility)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
EONIA & Co.
7
6
5
4
3
2
1
EONIA
Deposit facility
Marginal lending facility
Main refinancing
0
Jan.99 Jul.99 Jan.00 Jul.00 Jan.01 Jul.01 Jan.02 Jul.02 Jan.03 Jul.03
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The two-pillar strategy
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•
The monthly Eurosystem’s interest rate
decisions (every month) rests on two pillars:
Economic analysis
· Broad review of economic conditions
– Growth, employment, exchange rates, abroad
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Monetary analysis
· Evolution of monetary aggregates (M3, etc.)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Comparison with other strategies
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The US Fed
· Legally required to achieve both price stability and a
high level of employment
· Does not articulate an explicit strategy
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Inflation-targeting central banks (Czech
Republic, Poland, Sweden, UK, etc.)
· Announce a target (e.g. 2.5% in the UK), a margin
(e.g. ±1%) and a horizon (2-3 years)
· Compare inflation forecast and target, and act
accordingly
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Taylor rule interpretation
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Taylor rule
i = i* + a( - *) + b (y - y*)
· John Taylor from Stanford (1993)
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Take: * = 2%
i* = 4%
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(2% real, 2% target inflation)
Choose a and b
a = 2.0, b = 0.8
•
Compare with actual EONIA
· Begg et al. (2002)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
A Taylor rule example (1)
Inflation
3.5
3
2.5
2
1.5
1
0.5
0
Q1-1999
Q1-2000
Q1-2001
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Q1-2002
Q1-2003
Theory and Politics of European Integration
The European Monetary System
A Taylor rule example (2)
Output gap
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Q1-1999
Q1-2000
Q1-2001
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Q1-2002
Q1-2003
Theory and Politics of European Integration
The European Monetary System
A Taylor rule example (3)
8
7
6
5
4
3
2
1
0
Q1-1999
Q1-2000
Q1-2001
EONIA
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Q1-2002
Taylor rule
Q1-2003
Theory and Politics of European Integration
The European Monetary System
Does one size fits all?
• With one monetary policy, particular national
conditions cannot be attended to
• This is another version of the asymmetric shock
concern of the OCA theory: the cost must be
borne
• Monetary policy may also affect differently
different countries.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Independence and accountability
• Current conventional wisdom is that central banks
ought to be independent
• Governments tend not to resist to the “printing press”
temptation
• The Bundesbank has set an example
• But misbehaving governments are eventually
punished by voters
• What about central banks? Independence removes
them from such pressure
• A democratic deficit?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Redressing the democratic deficit
• In return for their independence, central banks
must be held accountable
• To the public
• To elected representatives
• Examples
• The Bank of England is given an inflation target by the
Chancellor. It is free to decide how to meet the target, but must
explain its failures (the “letter”).
• The US Fed must explain its policy to the Congress, which can
vote to reduce the Fed’s independence.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Eurosystem weak accountability
• The Eurosystem must report to the EU Parliament
• The Eurosystem’s President must appear before
the EU Parliament when requested, and does so
every quarter
• But the EU Parliament cannot change the
Eurosystem’s independence and has limited public
visibility
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The record so far
A difficult period
•
•
•
•
•
An oil shock in 2000
A worldwide slowdown
September 11
The stock market crash in 2002
Afghanistan, Iraq
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
The euro: too weak first, then too strong?
The euro/dollar exchange rate
1.2
1.1
1
0.9
0.8
Jan.99 Jul.99 Jan.00 Jul.00 Jan.01 Jul.01 Jan.02 Jul.02 Jan.03 Jul.03
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
But no seriously asymmetric shocks (1)
Inflation
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1991 1993 1995 1997 1999 2001 2003
Average
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Min
Max
Theory and Politics of European Integration
The European Monetary System
But no seriously asymmetric shocks (2)
GDP growth
20.0
15.0
10.0
5.0
0.0
-5.0
1991 1993 1995 1997 1999 2001 2003
Average
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Min
Max
Theory and Politics of European Integration
The European Monetary System
The Fiscal Policy and Stability Pact
•
Fiscal policy in the monetary union
· More and more important?
· Borrowing instead of transfers
· Automatic stabilizers and discretionary policy actions
•
Fiscal policy externalities
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·
·
·
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Spillovers and coordination
Cyclical income spillovers
Borrowing cost spillovers
Excessive deficit and the no-bailout clause
Collective discipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The fiscal policy instrument
•
In a monetary union, the fiscal instrument
assumes greater importance
· The only macroeconomic policy instrument left at the
national level
· Its effectiveness is increased (a result from the MundellFleming model)
•
A subsitute to transfers
•
Yet, many questions arise regarding its
effectiveness and use
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Limits on effectiveness
•
The crucial role of private expectations
· A deficit today but a debt tomorrow: who will pay?
· A tax cut, but how permanent?
•
Slow implementation
·
·
·
·
•
Agreement within government
Agreement within parliament
Spending carried out by bureaucracy
Taxes not retroactive
Result: countercyclical moves can become
procyclical actions
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
A crucial distinction: automatic vs. discretionary
•
Automatic stabilizers
· Tax receipts decline when the economy slows down,
and conversely
· Welfare spending rise when the economy slows down,
and conversely
· No decision, so no lag: nicely countercyclical
· Rule of thumb: deficit worsen by 0.5% of GDP when
GDP growth declines by 1%
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Public debt and automatic stabilizers in Europe, 2005
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
A crucial distinction : automatic vs. discretionary
• Discretionary actions: a voluntary decision to change tax
rates or spending
• Technically: a change in the structural budget balance
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
A crucial distinction : automatic vs. discretionary
• Discretionary actions: a voluntary decision to
change tax rates or spending
• Technically: a change in the structural budget
balance
• But no automatic correction of deficits, so a
problem of discipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Should instrument be subject to some form of collective control?
• Yes, if national fiscal policies are a source of
several externalities
• Income externalities via trade
• Important and strengthened by monetary union
• A case for some coordination
• Borrowing cost externalities
• One common interest rate
• But euro area integrated in world financial markets
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Income spillovers, 1972 -2005
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
What is the problem with the deficit bias?
• The track record is not really good:
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
What is the problem with the deficit bias?
• Fiscal indiscipline in parts of the euro area might
concern financial markets and:
• raise borrowing costs: unlikely, markets can distinguish
among countries
• More serious is the risk of default in one member
country
• capital outflows and a weak euro
• pressure on other governments to help out
• pressure on the eurosystem to help out
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The answer to default risk: the no bailout clause
• The no-bailout clause:
Overdraft facilities or any other type of credit facility
with the ECB or with the central banks of the
Member States (hereinafter referred to as ‘national
central banks’) in favour of Community institutions
or bodies, central governments, regional, local or
other public authorities, other bodies governed by
public law, or public undertakings of Member States
shall be prohibited, as shall the purchase directly
from them by the ECB or national central banks of
debt instruments. (Art. 101)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The answer to default risk: the no bailout clause
• The no-bailout clause
• Still, fears remain
• Informal pressure
• Impact on euro
• Prevention is better, especially given a tradition of
indiscipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
In the end, should fiscal policy independence be limited?
• The arguments for:
• Serious externalities
• A bad track record, anyway
• The arguments against:
• The only remaining macroeconomic instrument
• National governments know better the home scene
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The general principles
• Two general arguments for collective action
• Externalities
• Increasing returns
• Two general arguments against collective action
• Heterogeneity of preferences
• Information asymmetries
• And a caveat
• Governments may pursue own interests
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
How to restrain fiscal policies?
• Distinction No.1
• Micro/structural aspects (tax and spending levels and
structure)
• Macro aspects (the balance between tax revenues and
spending)
• Distinction No.2
• Coordination: voluntary and flexible efforts at taking into
account each other’s action
• Binding commitments or rules
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Stability and Growth Pact
• Formally, the implementation of the Excessive
Deficit Procedure (EDP) mandated by the
Maastricht Treaty
• The EDP aims at preventing a relapse into fiscal
indiscipline following entry in euro area
• The EDP makes permanent the 3% deficit and
60% debt ceilings and foresees fines
• The Pact codifies and formalizes the EDP
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
How the Pact works
• Emphasis on the 3% deficit ceiling
• Recognition that the budget balance worsens with
recessions:
• Exceptional circumstances when GDP falls by 2% or
more: automatic suspension of the EDP
• When GDP falls by more than 0.75%, country may apply
for suspension
• Precise procedure that goes from warnings to
fining
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The procedure
• When the 3% ceiling is not respected
• The Commission submits a report to ECOFIN
• ECOFIN decides whether the deficit is excessive
• If so, ECOFIN issues recommendations with an associated
deadline
• The country must then take corrective action
• Failure to do so and return the deficit below 3% triggers a
recommendation by the Commission
• ECOFIN decides whether to impose a fine
• The whole procedure takes about two years
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The fine schedule
• The fine starts at 0.2% of GDP and rises by 0.1%
for each 1% of excess deficit
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
How is the fine levied
• The sum is retained from payments from the EU to
the country (CAP, Structural and Cohesion Funds)
• The fine is imposed every year when the deficit
exceeds 3%
• The fine is initially considered as a deposit
• If the deficit is corrected within two years, the deposit is
returned
• If it is not corrected within two years, the deposit is
considered as a fine
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Broad Economic Policy Guidelines (BEPG)
• Emphasis on precautionary measures to avoid
warnings and fines
• The stability programmes are embedded in the
wider BEPG, a peer-monitoring process that
includes the Lisbon strategy
• Each year, each country presents its planned
budget for the next three years, along with its
growth assumptions
• The Commission evaluates whether the submission
is compatible with the Pact
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Issues raised by the Pact (1)
• The BEPG shift the focus to ex ante commitments
• Led to the Irish warning (2001)
• Decisions are taken by the ECOFIN, a political
grouping
• France and Germany treated leniently in 2003-4
• Imposition of a fine can trigger deep resentment
• Are fines credible?
• If not, what is left?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Issues raised by the Pact (2)
• Does the Pact impose procyclical fiscal policies?
• Budgets deteriorate during economic slowdowns
• Reducing the deficit in a slowdown may further deepen
the slowdown
• A fine both worsens the deficit and has a procyclical effect
• The solution: a budget close to balance or in
surplus in normal years
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Issues raised by the Pact (3)
• What room left for fiscal policy?
• If budget in balance in normal years, plenty of room left
for automatic stabilizers
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Issues raised by the Pact (3)
• What room left for fiscal policy?
• If budget in balance in normal years, plenty of room left
for automatic stabilizers
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Issues raised by the Pact (3)
• What room left for fiscal policy?
• If budget in balance or surplus in normal years, plenty of
room left for automatic stabilizers
• Some limited room left for discretion action
• In practice, the Pact encourages
• Aiming at surpluses
• Giving up discretionary policy
• The early years are hardest
• Takes time to bring budgets to surplus
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The early years (before slowdown)
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
2001
1998
Spain
-6
-4
-2
0
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
2
4
6
8
Theory and Politics of European Integration
The European Monetary System
Further controversies
•
Discipline imposed from outside
· A further erosion of sovereignty?
•
Arbitrary limits
· Why 3%?
· What about the debt celing of 60%?
•
•
•
Asymmetry
The Pact binds in bad years only
A budget forever close to balance or in surplus
would drive debt/GDP ratio to 0
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Exam
•
•
•
Trade and trade policy
Preferential trade liberalization
Trade and competition policies
· Monopolistic competition
•
Factor mobility
· Migration of labour
· Mobility of capital
•
•
Optimum currency areas
Eurosystem
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
The European Monetary System