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Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 13 The European Monetary Union (EMU) and the Fiscal Policy and Stability.

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Präsentation zum Thema: "Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 13 The European Monetary Union (EMU) and the Fiscal Policy and Stability."—  Präsentation transkript:

1 Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 13 The European Monetary Union (EMU) and the Fiscal Policy and Stability Pact Theory and Politics of European Integration

2 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System Last Lecture Optimum Currency Area (OCA) Theory ·Asymmetric shocks Criteria of on OCA ·Openness ·Diversification ·Labour mobility ·Fiscal transfers ·Homogenous preferences ·Solidarity vs. nationalism Is Europe an OCA? Will Europe become an OCA? ·Effects of a currency union on trade ·On trade specialisation ·Labour markets ·Fiscal transfers ·Beyond OCA criteria: politics

3 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 ·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

4 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System The long road to Maastricht and to the euro The EMU Timetable

5 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 A list of five criteria for admission to the monetary union A precise specification of central banking institutions Additional conditions mentioned (e.g. the excessive deficit procedure)

6 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 Not to exceed by more than 2% the average interest rate in the three lowest inflation countries ERM membership At least two years in ERM without being forced to devalue Budget deficit Deficit less than 3% of GDP Public debt Debt less than 60% of GDP ·Note: observed on 1997 performance for decision in 1998

7 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

8 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 …

9 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

10 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

11 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

12 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System The debt and deficit criteria in 1997

13 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System A tour of the acronyms 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 + non- participating NBCs (no decision-making competence)

14 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System The system

15 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System How does the Eurosystem operates? Objectives What it is trying to achieve? Instruments What are the means available? Strategy How is the system formulating its actions?

16 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

17 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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?

18 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System Instruments (1) Remember the channels of monetary policy 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

19 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

20 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System EONIA & Co.

21 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System The two-pillar strategy 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 Monetary analysis ·Evolution of monetary aggregates (M3, etc.)

22 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System Comparison with other strategies The US Fed ·Legally required to achieve both price stability and a high level of employment ·Does not articulate an explicit strategy 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

23 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System Taylor rule interpretation Taylor rule i = i* + a( - *) + b (y - y*) ·John Taylor from Stanford (1993) Take: * = 2% i* = 4% (2% real, 2% target inflation) Choose a and b a = 2.0, b = 0.8 Compare with actual EONIA ·Begg et al. (2002)

24 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System A Taylor rule example (1)

25 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System A Taylor rule example (2)

26 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System A Taylor rule example (3)

27 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

28 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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?

29 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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.

30 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

31 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System 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

32 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System The euro: too weak first, then too strong?

33 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System But no seriously asymmetric shocks (1)

34 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System But no seriously asymmetric shocks (2)

35 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 ·Spillovers and coordination ·Cyclical income spillovers ·Borrowing cost spillovers ·Excessive deficit and the no-bailout clause ·Collective discipline

36 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 Mundell- Fleming model) A subsitute to transfers Yet, many questions arise regarding its effectiveness and use

37 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

38 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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%

39 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System Public debt and automatic stabilizers in Europe, 2005

40 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

41 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

42 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

43 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System Income spillovers,

44 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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:

45 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

46 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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)

47 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

48 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

49 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

50 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

51 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

52 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

53 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

54 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

55 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

56 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

57 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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 Imposition of a fine can trigger deep resentment Are fines credible? If not, what is left?

58 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

59 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

60 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

61 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

62 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System The early years (before slowdown)

63 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | 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

64 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | | Theory and Politics of European Integration The European Monetary System 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


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