Showing papers by "Directorate-General for Economic and Financial Affairs published in 2009"

Beyond the SGP: Features and Effects of EU National-Level Fiscal Rules

Abstract: This chapter provides a comprehensive overview of the numerical fiscal rules in force in the 25 countries of the European Union, examines the reasons for the growing appetite for such rules, and assesses whether they have an influence on budgetary developments. The analysis is based on a new dataset constructed from questionnaires submitted to experts in finance ministries of EU countries which report a large amount of information on the numerical fiscal rules in force in the EU countries over the 1990–2005 period. The chapter shows that the number of fiscal rules in force in the EU countries has increased in the past decades. The introduction of the Maastricht Treaty and of the SGP seem to have been catalysts for the introduction of fiscal rules. The analysis, based on the estimation of augmented fiscal reaction functions, confirms the existence of a relation between numerical fiscal rules and budgetary developments. The results show that some dimensions matter particularly for the capacity of fiscal rules to influence fiscal policy. Notably, the share of government finances covered by rules and the presence of strong enforcement mechanisms seem to be particularly relevant.

The Cyclically-Adjusted Budget Balance in EU Fiscal Policy Making: A Love at First Sight Turned into a Mature Relationship

Abstract: The cyclically-adjusted budget balance (CAB) plays a key role in the fiscal surveillance framework of the Economic and Monetary Union. It started off in a supporting role in the shadow of the headline deficit and, before long, turned into the linchpin of the rules and requirements of the Stability and Growth Pact. The steep ascent was driven by high hopes and expectations which, with the passing of time were only partly met. The everyday practice of the EU fiscal surveillance rapidly revealed a number of caveats of the instrument which, at times, hampered the effectiveness of fiscal surveillance. This paper provides a comprehensive review of the changing fortunes of the CAB in the EU fiscal surveillance framework. It portrays its main shortcomings and the way they can be dealt with in practice. As an overall conclusion the paper argues that, although the CAB is not devoid of problems and imperfections, it is superior to the headline deficit in most respects.

Defying the 'juncker curse': can reformist governments be re-elected?

Abstract: European policy makers, notably in the euro area, seem to take for granted that the electorate will punish them for bold reform in product and labour markets. This may explain why progress in the euro area has been comparatively limited. This paper posits and, using a dataset for 21 OECD countries, shows that this fear of electoral backlashes is unfounded, provided that financial markets work well. The mechanisms involved are relatively straightforward: well functioning financial markets “bring forward” future yields of structural reform to the present, thus permitting to overcome possible short-run costs. As a result, the electorate tend to reward, not punish, reformist governments. This has important implications for the design of structural reform packages, with financial market reforms being an essential ingredient beside product and labour market reforms.

Inflation Dynamics and the New Keynesian Phillips Curve in EU-4

Abstract: The paper seeks to shed light on inflation dynamics of four new EU member states (the Czech Republic, Hungary, Poland and Slovakia). To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds forward-looking component, the backward-looking one is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.

Assessing the Short-Term Impact of Pension Reforms on Older Workers’ Participation Rates in the EU: A Diff-in-Diff Approach

Abstract: In this paper, the authors build a comprehensive data set of the pension reforms legislated in the EU between 1990 and 2006. They classify the reforms in three broad classes: fundamental changes to the old-age scheme (i.e., changes in the way the pension system is financed and/or in the eligibility conditions), non-fundamental changes to the old-age scheme and changes to early retirement schemes. They use the reform data set to conduct a “policy experiment” to assess the effects of such reforms on participation rates. It turns out that the benefits of reforms are somewhat elusive and depend on the age bracket, the gender and the nature of the reform. The effects are often non-significant and/or negative. The authors conclude that it is crucial, in order to maximize the labour market effects of pension reforms, to provide enough information to workers and to avoid lengthy and uncertain phase-in periods.

The EU-US Total Factor Productivity Gap: An Industry-Level Perspective

Abstract: The EU-US total factor productivity (TFP) growth gap since the mid-1990's is concentrated in a handful of market service industries (most notably retail trade) and in ICT-producing manufacturing, whilst the EU exhibits a stronger performance in a number of the network utilities. This paper explores the industry-specific determinants of the EU-US TFP growth gap using the EU KLEMS database. As found in previous analyses (e.g., Nicoletti and Scarpetta (2003); Griffith, Redding, and Van Reenen (2004); Inklaar, Timmer and Van Ark (2008)), TFP growth appears to be driven by catching-up phenomena associated with the gradual adoption of new-vintage technologies. Compared with previous analyses, TFP growth is also significantly driven by developments taking place at the technological frontier, increasingly so since the mid-1990's. Industries with higher RD network utilities are strongly affected by improvements associated with reduced product market regulations; whilst the retail trade industry is significantly influenced by consumption dynamics which permit a better exploitation of scale economies.

Monetary Policy Rules and Inflation Process in Open Emerging Economies: Evidence for 12 New EU Members

Abstract: This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility.

Constricted, Lame and Pro-Cyclical? Fiscal Policy in the Euro Area Revisited

Abstract: It is often argued that fiscal stabilisation in the euro area compares unfavourably with the US, not least because of the perceived limitations of the Stability and Growth Pact. This paper qualifies this perception by taking a closer look at fiscal policy making since the mid-1990s. It examines a number of elements which are generally overlooked or not considered in the analysis of fiscal stabilisation. In particular, on top of discretionary fiscal policy, which generally is at the core of existing studies, it also takes into account the size of automatic stabilisers. Moreover, it considers the difference between policy intentions, as formulated or perceived in real time, and actual outturns, and possible reasons for the gap between the two. On the basis of such a more specific analysis, fiscal stabilisation in the euro area appears less dire than commonly assumed. It also suggests a number of points on how to improve the track record, including by strengthening fiscal governance.

The euro: past successes and new challenges

Abstract: The successes of the first decade of European Economic and Monetary Union are impressive, but it is fair to stress these were achieved in a relatively benign economic environment characterised by steady global growth, supportive financial conditions and fiscal windfalls associated with booms in asset markets. Although all this has come to an abrupt end with the financial crisis, there is a silver lining of fiscal stimulus being more effective in EMU than without the single currency, with offsetting exchange rate responses absent, trade multipliers stronger and the fiscal framework credible. But the financial crisis also clearly demonstrated the need for stronger coordination of national policy actions to internalise cross-border spillovers. Meanwhile, the European Commission has a major role to play in striking the right balance between short-term emergency measures and longer-term priorities. Against this backdrop, this article sheds light on the longer-run challenges and the policy agenda for meeting them.

Euro-Mediterranean Process - Union for the Mediterranean: Macroeconomic and financial developments during the global crisis at the southern rim of the Mediterranean

Abstract: Although the global financial and economic crisis hurt economies worldwide, the economies at the southern Mediterranean region have done relatively well to weather this global hurricane. Economic growth in the region has slowed down but the size of the trough of these economies' business cycle has ultimately been dependent on the length and vigour of domestic economic policy reactions. Escaping from a difficult period featuring soaring food and oil prices the economies of the southern Mediterranean region are faced with new challenges that impact both their real and financial sectors, as negative effects from their real sector spilled over to their financial sectors. This chapter analyzes recent macroeconomic, monetary and financial developments, the use of fiscal, monetary and financial policy instruments, the volatility at their financial markets, trade openness and the imperative need for good governance which is the umbrella under which economic policy instruments are called to operate.