Transcript Revision EU446 - eu

Multilevel governance in fiscal
consolidation and stabilisation
Waltraud Schelkle ([email protected])
Deborah Mabbett ([email protected])
Practitioners’ Forum , 30-31 March 2006, LSE:
‘Policy learning and experimentation in EU
economic governance’
Overview
A.
B.
What comparative fiscal federalism tells us
and misses..
What the empirical data show us..
•
•
•
C.
How great is the need for differential fiscal
responses?
How adequate are member states’ responses?
Do the responses add up to a consistent fiscal
policy for EMU?
How our findings differ from received
wisdom..
LSE, 30-31 March 2006
Practitioners' Forum on policy learning and
experimentation in EU economic governance
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What comparative fiscal federalism
tells us..
Agents in fiscal federations have little incentive
to keep financial discipline (eg von Hagen et
al 2001)
• Implicit bail-out guarantee of a political union
• Incentives for tax competition and more debt
finance in a monetary union
Therefore, fiscal discipline has to be imposed by
balanced budget rules (SGP);
But these may produce pro-cyclical fiscal policy
(Hallerberg and von Hagen 1999).
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What comparative fiscal federalism
misses..


Little incentive for free-riding due to lack of
fiscal transfers and an explicit no bail-out
clause.
Agents, ie the member states, have signed
themselves up to fiscal discipline.
Instead, problems may arise because
constraints on agents/MS are not matched
by collective risk pooling (Schelkle 2005).
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What the empirical data shows
us (1)..
How much need is there for a differential
response of macroeconomic policies?
 Required interest rates according to Taylor
rule (cf. Gramlich and Wood 2000)
i* = r* + 0.5(output gap + excess inflation)
r* = 2%
Output gap = Actual minus trend GDP in percent of
GDP at 1995 market prices
Excess inflation = inflation rate above 1.5%
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Need for a differential response
of macroeconomic policy (1)?
Taylor Rules for EMU-11, 1999-2006
6
Belgium
Greece
Germany
Spain
France
Ireland
Italy
Netherlands
Austria
Portugal
Finland
5
4
3
2
1
0
1999
2000
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2001
2002
2003
2004
2005
Practitioners' Forum on policy learning and
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2006
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Need for a differential response
of macroeconomic policy (2)?
Taylor Rules for EMU-4 and actual ECB rates
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1999
2000
2001
Germany
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2002
Spain
France
2003
Italy
Practitioners' Forum on policy learning and
experimentation in EU economic governance
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2005
2006
actual ECB rate
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What the empirical data shows
us (2)..
How well did member states’ fiscal
policies respond?
 Correlation between changes in budget
deficits and changes in output gaps (cf.
Gramlich and Wood 2000):
• Actual deficits: Pro- or countercyclical?
• Structural deficits: Discretionary stance?
• Volatility of GDP and budget responses:
Fiscal activism up or down?
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Practitioners' Forum on policy learning and
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Actual deficits: counter-cyclical
(positive correlations)?
Responsiveness of actual deficits (based on trend GDP)
to output gap changes
1.00
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0.00
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1983-92
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1993-99
2000-05
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experimentation in EU economic governance
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Structural deficits: countercyclical (1)?
nd
Fi
nl
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1983-92
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Ita
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1.00
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
-0.60
-0.80
-1.00
-1.20
um
Responsiveness of structural deficits (incl. interest) to changes
in output gaps
1993-99
2000-05
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Structural deficits excluding
interest: counter-cyclical (2)?
Responsiveness of structural deficits (excl. interest) to changes
in output gaps
1.00
0.80
0.60
0.40
0.20
nd
Fi
nl
a
l
tu
ga
Po
r
Au
st
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a
s
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la
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Ita
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Sp
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-0.60
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-0.40
um
-0.20
y
0.00
-0.80
1983-92
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1993-99
2000-05
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experimentation in EU economic governance
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Fiscal activism: Paralysed or
adequate?
Volatility of GDP and responsiveness of fiscal policy in different periods
(standard deviations)
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7.00
6.00
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4.00
3.00
2.00
1.00
0.00
Practitioners' Forum on policy learning and
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Euro area
Belgium
FR. Germany
Greece
Spain
France
Ireland
Italy
Netherlands
Austria
Portugal
Finland
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What the empirical data shows
us (3)..
Do member states’ responses add up
to the right policy mix and an
appropriate aggregate fiscal
stance?
 Policy mix: Taylor rule for the Euro
area and actual ECB interest rates.
 Aggregate fiscal stance: sum of
actual and structural deficits.
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The policy mix for EMU
Taylor rule for the Euro area and actual ECB interest rates in
relation to Euro area output gap
5
2.5
2
1.5
1
0.5
0
-0.5
-1
4
3
2
1
0
1999
2000
2001
2002
2003
2004
2005
2006
Euro area Taylor Rule (LHS)
ECB rate (LHS)
discrepancy between TR for Euro area and actual ECB rate
Euro area output gap (based on trend)
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Aggregate fiscal stance
Euro area aggregate deficit indicators (%)
3
2
1
0
-1
Actual aggregate
deficit
Structural aggregate
deficit (potential
GDP)
Structural aggregate
deficit (trend GDP)
-2
Structural aggregate
deficit (trend GDP)
excl interest of
general gov't
1999
2000
2001
2002
2003
2004
2005
2006
-3
-4
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How our findings differ from received
wisdom (1)..
The sub-central (MS) level is less of a problem.
•
Fiscal discipline of MS does not appear to
have deteriorated.
•
Stabilisation policies of MS have, if anything,
improved.
•
Asymmetries seem to have become smaller
(supported by recent findings on the
synchronisation of business cycles).
LSE, 30-31 March 2006
Practitioners' Forum on policy learning and
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How our findings differ from received
wisdom (2)..
But the central (EMU) level is not fulfilling
its function.
•
Monetary policy seems to be too tight.
•
The aggregate fiscal stance hardly
moves with the Euro area output gap.
•
The aggregate fiscal stance provides
little stimulus.
LSE, 30-31 March 2006
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Conclusion (1)



Research focus in fiscal federalism has been on
the agents’ incentives and how they can be
constrained.
An alternative interpretation of the governance
framework is that national governments have
sought to get better control over their domestic
fiscal policies, using EMU as a lever
(laboratory federalism).
We find signs of success with this.
LSE, 30-31 March 2006
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experimentation in EU economic governance
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Conclusion (2)


But the governance framework does not
provide for adjusting the aggregate
fiscal position in the light of the
required macroeconomic stance.
This omission becomes a more pressing
issue with the vanishing of asymmetries
and the synchronisation of cycles.
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experimentation in EU economic governance
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