Download Pre-crisis economic governance The

DG ECFIN
Strengthening European Economic Governance –
Surveillance of Fiscal and Macroeconomic Imbalances
Servaas DEROOSE
Deputy Director-General
DG ECFIN, European Commission
Brussels Economic Forum
Wednesday, 18 May 2011
Rethinking economic policy in Europe – A new era of EU economic governance
Outline
DG ECFIN
I.
Pre-crisis economic governance


The ‘Great Moderation’ paradigm
The crisis as eye opener
II. Post-crisis economic governance


Strengthening existing instruments
Adding new instruments
Pre-crisis economic governance
DG ECFIN
The “Great Moderation” Paradigm
“Fiscal discipline in combination with low and
stable inflation are necessary and sufficient
conditions for overall macroeconomic stability“
 The Maastricht Treaty laid down the
architecture of EU economic governance in
reflection of the main tenets of the “Great
Moderation” paradigm
Pre-crisis economic governance
DG ECFIN
The crisis as an eye opener
 The crisis has seriously questioned the validity
of the “Great Moderation” paradigm
 Rethinking of macro-economic policy is
underway
 The Maastricht assignments are still valid
for the EU but they need to be strengthened
and complemented with new elements
Pre-crisis economic governance
DG ECFIN
180
2
5
160
1
140
0
Net lending (+) or net borrow ing (-) of general government (% of GDP)
-6
2010
0
2009
-5
2008
20
2007
-4
2006
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-35
40
2005
-30
-3
60
2004
-25
-2
80
2003
-20
100
2002
-15
-1
2001
-10
120
2000
-5
% of GDP
0
House prices (2000=100)
10
Current account balance (% of
GDP)
Ireland: Solid public finances but unsustainable imbalances
Real house prices (index; 2000=100; consumer deflator); data for
2010 not yet available.
Current account balance (% of GDP)
6
Post-crisis governance:
DG ECFIN
The broader ‘geography’ of reform
More effective
preventive arm of
SGP
Focus on debt
developments
(corrective arm of
SGP)
Crisis
resolution
Sound fiscal
policy
• Better
enforcement:
disincentives/
Sanctions
• National
frameworks
Prevention and
correction of macro
imbalances
Structural reform
strategy (Europe
2020)
Sound
Balanced
fiscal
growth
policy
Macro-prudential
supervision
Regulation and
supervision of
financial systems
Post-crisis economic governance
DG ECFIN
More effective
preventive arm of
SGP
Focus on debt
developments
(corrective arm of
SGP)
Sound fiscal
policy
Sound fiscal policy
• Better
enforcement:
disincentives/
Sanctions
• National
frameworks
Expenditure benchmark
Anchoring expenditure to sustainable path and
stabilising the economy over the cycle
Numerical debt benchmark (on average 1/20 per year over
three preceeding years)
Stronger emphasis on debt developments so as to put
deficit and debt criteria on equal footing
Slide 7
Post-crisis economic governance
DG ECFIN
Potential benefits of expenditure benchmarks
Portugal
4
2
6
4
2
0
% of GDP
6
% of GDP
Greece
0
-2
-2
-4
-4
-6
-6
-8
-8
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
actual budget balance
budget balance with expenditure benchmark
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
actual budget balance
budget balance with expenditure benchmark
Slide 8
Post-crisis economic governance
DG ECFIN
Debt benchmark: Respected by Belgium, not by Italy
Belgium
Italy
140
140
130
130
120
120
110
110
100
100
adjusted debt ratio
benchmark
debt ratio
90
adjusted debt ratio
benchmark
debt ratio
90
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
Simulations using the actual budget
balances
1992
80
80
Simulations using the budget balance
strengthened by 1.5 percentage points of GDP
Slide 9
compared to actual values
Post-crisis economic governance
DG ECFIN
More effective
preventive arm of
SGP
Focus on debt
developments
(corrective arm of
SGP)
Sound fiscal
policy
Sound fiscal policy
• Better
enforcement:
disincentives/
Sanctions
• National
frameworks
Improving the enforcement of fiscal surveillance
New sanctions from a graduated set of enforcement instruments
with higher degree of deterrance
Minimum standards for national fiscal frameworks
Ensuring consistency between EU rules and national rules,
fostering national ownership and promoting fiscal discipline
Slide 10
Post-crisis economic governance
DG ECFIN
Sanctions/disincentives in fiscal surveillance
Corrective
In case of
persistent
deviation from
adjustment
towards MTO:
Council recom.
+
interest-bearing
deposit (euroarea MS
Excessive deficit
Preventive
When MS
is put in
EDP:
deposit
becomes
non
interest
bearing
If MS does
not take
effective
actions:
deposit
turns into
fine 0.2%
of GDP
In case of repeated non
compliance:
-Enhanced reporting
obligations
- EIB invited to
reconsider lending
policy to MS
concerned
- Fine of min. 0.2 and
max. 0.5% of GDP:
Council can reject with QMV
New: graduated approach
existing
Post-crisis economic governance
DG ECFIN
The quality of fiscal frameworks makes a difference
2.5
High values of the fiscal
rule index (more than
median but below fourth
quartile)
Average primary cyclically-adjusted
balance, as a percentage of GDP
2.0
25% highest values of
the fiscal rule index
1.5
1.0
0.5
25% lowest values
of the fiscal rule
index
Low values of the
fiscal rule index (less
than median but above
first quartile)
0.0
-0.5
-1.0
Slide 12
Post-crisis economic governance
DG ECFIN
New tools to tackle macro imbalances
Sound fiscal
policy
Prevention
and correction
of macro
imbalances
Sound
fiscal
Balanced
policy
growth
 Preventive dimension
– Alert mechanism based on expert analysis and a “scoreboard”
of risk indicators
– Country-specific in-depth analysis and “preventive”
recommendations where warranted
 Corrective dimension
– Excessive imbalances procedure (EIP)
– Publication of prescriptive recommendations with deadline for
corrective action and possible sanctions
 Avoiding imbalances due to consumption and housing
booms or weaknesses in domestic demand
Slide 13
Post-crisis economic governance
Sound fiscal
policy
DG ECFIN
Multi-coloured scoreboard to “flash” red in case of alert
Total number of imbalances per year
Prevention
and correction
of macro
imbalances
WORK IN
PROGRESS
Sound
fiscal
Balanced
policy
growth
2001
2002
2003
2004
2005
2006
2007
2008
2009
BE
3
3
4
3
3
4
3
3
3
DE
1
2
1
1
3
3
3
3
3
IE
3
2
1
4
4
4
4
5
4
EL
4
3
4
4
5
5
5
4
4
ES
3
3
3
5
6
6
5
4
4
FR
2
1
1
2
3
2
2
3
3
IT
2
3
1
2
2
2
2
2
2
CY
3
4
3
5
5
4
2
2
2
LU
2
2
2
2
1
2
3
2
2
MT
2
2
1
1
2
2
3
3
3
NL
2
2
3
3
3
2
3
4
4
AT
2
2
1
1
1
1
0
1
1
PT
3
3
4
4
5
5
6
5
5
SI
1
0
0
0
1
1
2
2
2
SK
3
2
1
2
3
4
4
3
3
FI
3
2
1
2
2
3
2
3
2
BG
2
1
3
2
5
5
6
6
4
CZ
1
2
2
2
2
1
2
1
2
DK
2
1
1
2
1
2
2
2
2
EE
2
3
3
4
5
6
5
4
3
LV
2
2
4
4
4
5
4
4
3
LT
1
1
2
3
5
4
5
4
3
HU
3
4
5
4
5
4
4
5
5
PL
2
1
1
2
1
3
2
4
3
RO
3
1
1
1
3
4
5
4
5
SE
2
2
2
2
3
2
4
2
3
UK
0
1
1
3
1
3
2
1
3
Slide 14
Post-crisis economic governance
DG ECFIN
Sound fiscal
policy
Prevention
and correction
of macro
imbalances
Unwinding of imbalances and public finances
Sound
fiscal
Balanced
policy
growth
Unwinding of imbalances and public finances
Change of gov. debt (% of GDP)
2007-2010
60
y = -3.5993x + 15.362
IE
50
R2 = 0.5383
40
EL
ES
30
PT
20
10
LU
FR
NL
BE
FI
DE
AT
IT
0
-6
-4
-2
0
2
4
Change of current account (% of GDP) 2004-2007
Slide 15
Will it work this time?
DG ECFIN
 Crisis has heightened our awareness of previous weaknesses
– New governance approach much broader
– Increased ownership by Member States
 Accompanied by other important measures
– New EU financial supervision framework
– Measures dealing with sovereign debt crises
– European Semester: a more effective calender for assessing
economic policy making in the Member States
 New rules interacting with increased attention of financial
markets
Slide 16