Directorate-General for Economic and Financial Affairs

About: Directorate-General for Economic and Financial Affairs is a government organization based out in Brussels, Belgium. It is known for research contribution in the topics: Fiscal policy & European union. The organization has 80 authors who have published 145 publications receiving 4262 citations. The organization is also known as: ECFIN & GD ECFIN.

Leading Indicators of Crisis Incidence: Evidence from Developed Countries

Abstract: We search for early warning indicators that could indicate important risks in developed economies. We therefore examine which indicators are most useful in explaining costly macroeconomic developments following the occurrence of economic crises in EU and OECD countries between 1970 and 2010. To define our dependent variable, we bring together a (continuous) measure of crisis incidence, which combines the output and employment loss and the fiscal deficit into an index of real costs, with a (discrete) database of crisis occurrence. In contrast to recent studies, we explicitly take into account model uncertainty in two steps. First, for each potential leading indicator, we select the relevant prediction horizon by using panel vector autoregression. Second, we identify the most useful leading indicators with Bayesian model averaging. Our results suggest that domestic housing prices, share prices, and credit growth, and some global variables, such as private credit, are risk factors worth monitoring in developed economies.

‘Close‐to‐Balance or in Surplus’: A Policy‐Maker's Guide to the Implementation of the Stability and Growth Pact

Abstract: Under the Stability and Growth Pact, countries are committed to achieve medium-term budget positions of ‘close-to-balance or in surplus’. The rationale for this commitment is that such budgetary positions would allow for the full working of the built-in stabilizers without triggering the sanctions procedures of the Pact. This article sets out to show how quantifications of the medium-term (structural) requirement can accommodate the desired aim and suggests how fiscal measurement and forecasting errors as well as the budgetary effects of ageing may be allowed for. All in all, broadly balanced budgets in the medium term appear to be ‘roughly right’ for most euro-zone countries. Of course, as the cyclical behaviour of the euro-zone economy adapts to the new EMU environment, the medium-term targets will need to be addressed again.

The EMU Debt Crisis: Early Lessons and Reforms*

Abstract: The economic and financial crisis and its aftermath have put economic and monetary union (EMU) to the test and exposed gaps in its initial policy architecture. Collective rules of fiscal discipline have proven difficult fully to enforce and excessive public indebtedness has been confirmed as a potential source of systemic instability. Broader economic and financial imbalances have also been shown to carry important risks for individual Member States' and area-wide stability. Recent governance reforms have sought to address these shortcomings. In particular, the so-called ‘Six-Pack’ has brought changes strengthening the ability to prevent and correct economic and fiscal imbalances in the future. With the crisis not terminated, however, the debate over optimal policy arrangements continues and additional governance reforms have been put forward. This article reviews some lessons drawn from the crisis episode for the economic and budgetary framework of EMU and describes the governance reforms that have been undertaken as part of the comprehensive solution needed to underpin the single currency.

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.

Government Expenditure and Economic Growth in the EU: Long-Run Tendencies and Short-Term Adjustment

Abstract: This paper analyses the both the long and the short-run relation between government expenditure and potential output in EU countries. Having a satisfactory measurement of these relations has relevant implications for policy. From a long-term perspective, it improves the understanding of the links between output growth and public finances sustainability. Over a medium-to-short run horizon, it provides a benchmark to evaluate the stance of expenditure policy. In the analysis, the panel dimension of the data set is exploited in such a way: (i) to improve the power of statistical tests for the analysis of the dynamic properties of macroeconomic series through panel unit root and panel co-integration tests; (ii) to obtain country-specific information on adjustment dynamics by means of pooled mean group estimation. Results show that, over a sample comprising EU-15 countries over the 1970-2003 period, it cannot be rejected the hypothesis of a common long-term elasticity between cyclically-adjusted primary expenditure and potential output close to unity. The long-run elasticity is however not stable over time (it decreased considerably over the decades) and is significantly higher than unity in catching-up countries, in fast-aging countries, in low-debt countries, and in countries with weak numerical rules for the control of government spending. The average speed of adjustment of government expenditure to its long-term relation is 3 years, but there are significant differences across countries. Anglo-Saxon and Nordic countries exhibit in general a faster adjustment process, while adjustment in Southern European countries appears somehow slower.