Transcript Europe`s fiscal reaction to the crisis

THE EURO AREA FISCAL POLICY RESPONSE TO
THE ECONOMIC CRISIS: THE FIRST YEAR
Ad van Riet
Head of Fiscal Policies Division
European Central Bank
Bucharest, 18-19 November 2009
This presentation has been prepared with the excellent support of Cristina Checherita and partly draws on her work
Outline
1. Introduction
2. The effectiveness of a fiscal impulse for the economy

Automatic stabilisation

Discretionary fiscal policies
3. Assessing the European Economic Recovery Plan
4. The fiscal outlook for the euro area
5. Lessons for fiscal discipline
Decomposition of the fiscal impulse
Fiscal impulse
(Change in the general government
balance; total or primary)
Fiscal stance
Automatic stabilisers
(Change in the cyclically-adjusted
balance)
(Change in the cyclical component;
Capture the impact of the cycle)
Fiscal stance
~
Discretionary fiscal policy
impact
(Policy measures)
Non-policy effects
-
revenue windfalls/shortfalls;
built-in momentum of public
expenditure (e.g. wages);
output gap estimation
Fiscal stimulus
packages
Other policy
measures
(Measures taken in
response to the crisis)
(including non-crisis
related measures)
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Fiscal impulse 2008-10 in euro area and US
Change in budget balance due to automatic stabilisers and fiscal stance (% of GDP)
0.0
Euro Area
US
-1.0
-2.0
Automatic
Stabilisers
Automatic
Stabilisers
-3.0
-4.0
-5.0
Expansionary
fiscal stance
Expansionary
fiscal stance
Automatic stabilisers
typically play a more
important role in
European economies
compared to the U.S.
due to larger public
sectors
-6.0
-7.0
-8.0
Source: ECB calculations based on IMF October 2009 World Economic Outlook
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European Economic Recovery Plan
• Aim: limit the impact of the economic crisis via coordinated
fiscal measures at the EU and national level
• Budgetary stimulus measures of €200 bn (~1.5% of EU GDP),
o/w €170 bn from Member States and €30 bn from EU and
EIB budgets
• Stimulus to be differentiated across Member States to reflect
their own needs and room for budgetary manoeuvre
• Governments to ensure a timely, targeted and temporary fiscal
stimulus (TTT-criteria for success)
• Fiscal stimulus to be consistent with the Stability and Growth
Pact and Lisbon Strategy
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Four categories of fiscal stimulus measures
Composition of stimulus measures (2009-2010)
Euro area, share (%) in terms of budgetary impact
Public investment
Measures aimed
28%
at households
50%
Measures aimed
at businesses
Labour market
17%
measures
5%
Source: European Commission (2009 Annual Report on the euro area) and ECB staff calculations.
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Size of fiscal stimulus packages 2009, 2010
Timely? Temporary?
2.5
% GDP
2
ESP
AUT
1.5
FIN
MLT
DEU
2009
1.0
LUX
EA16
FRA
PRT
NLD
0.5
SVN
IRL
BEL
SVK/ CYP
0
GRC/ ITA
0
0.5
1.0
Fiscal stimulus 2010
1.5
2.0
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1
Euro area budget balance over 1998-2010
-1.0
-2.0
-3.0
Government net lending (+) / borrowing (-) and components
Euro area, percent of GDP
-4.0
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Accommodating the
impact of automatic
stabilisers (yellow)
and organising fiscal
stimulus (red) during
the crisis has come
at a very high cost
for public finances.
Also high structural
deficit (blue) must be
corrected.
-5.0
-6.0
0
-2
-4
-6
-8
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Fiscal Stimulus Packages
Cyclical component of budget balance
Cyclically adjusted balance budget (excl. fiscal stimulus)
Government budget balance
Source: EC Forecast Autumn 2009
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Euro area public finances under strain
Budget balance of euro area countries in 2007 and 2010 (% GDP)
6.0
4.0
2.0
0.0
-2.0
-3%
-3%
-4.0
-6.0
Euro Area
-8.0
-10.0
2007
-12.0
2010
-14.0
-16.0
BE
DE
IE
GR
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
Euro
Area
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Lessons for fiscal discipline
• Need to comply with medium-term budgetary objectives
• Coordinated fiscal expansion to remain exception rather than
become the new rule, especially if result is excessive deficits
• Any coordinated fiscal stimulus must be combined with credible
exit strategies to anchor expectations of fiscal sustainability
• Need to preserve confidence in the recovery phase via:
 a timely withdrawal of the fiscal stimulus measures
 adopting credible consolidation plans within the framework
of the Stability and Growth Pact
• Fiscal consolidation should meet the SSS-criteria for success:
 Substantial
 Structural
 Spending-based
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THANK YOU
FOR YOUR ATTENTION !
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