Transcript Document

Professor
Stefan
Collignon
Fiscal Policy and Democracy in Europe
Österreichische Nationalbank, Wien, 5.11. 2004
Stefan Collignon
Professor of European Political Economy
LSE
1
Professor
Stefan
Collignon
Europe’s fiscal Constitution
The Constitutional Treaty brings many
innovations
• Efficiency in policy making
• Greater role of EP
• Citizens and states as equal source of
European sovereignty (art.1)
2
Professor
Stefan
Collignon
Europe’s fiscal Constitution
But the Constitutional Treaty
• Has not innovated on fiscal policy
• Has even reduced the EU-budget powers of
the European Parliament
• Instead: SGP passes from rule-based to
arbitrary arrangement among governments
 Pre-democratic fiscal policy
3
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Fiscal policy matters for economy
• Automatic stabilizers smoothen disposable income
and demand
• Discretionary tax policies aim at supply side
effects
» ECB Monthly Bulletin, April 2004
But also for democracy
• Imposing rules on democratically elected Govts?
– The irony of new MS: surrender democracy at the door
• “No taxation without representation”
• Therefore: only national competence?
4
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Fiscal federalism assigns functions to
jurisdictions:
• Allocation policy : decentralised
– Preference heterogeneity
• Stabilisation policy: centralised
– Collective action problem
• Redistribution policy : centralised
– Collective action problem
5
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Europe’s fiscal Constitution is not optimal:
•
•
•
•
The bulk of spending is through national budgets
EU budget only 1% of GDP
SGP is only loose coordination tool
What matters for macroeconomic stability is the
interaction of monetary policy with the aggregate
fiscal stance
6
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Figure 1. Total Public Spending as percent of GDP
Sw eden
France
Austria
50.9%
0.6%
50.6%
0.8%
47.4%
0.8%
47.0%
0.9%
0.8%
46.0%
44.2%
Finland
1.0%
43.5%
Netherlands
0.8%
42.6%
0.9%
42.0%
0.8%
39.9%
Luxembourg
0.9%
37.8%
United Kingdom
0.9%
36.8%
0.9%
37.0%
0.8%
0.9%
33.2%
Ireland
26.9%
0%
10%
National Public Sector 2003
EU spending
1.1%
20%
30%
40%
50%
60%
7
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Stabilisation policy is not optimal
• Automatic stabilisers work
• But SGP is far from being applied
• Uncoordinated fiscal policy led to monetary
tightening
• SGP can not guarantee coherent aggregate fiscal
policy stance
• SGP introduces rigidity into the conduct of fiscal
policy
8
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Firgure 2. Euroland aggregate fiscal stance
3
EM
2
1
0
-1
-2
-3
Euro area actual deficit
Excessive Deficit
structural deficit
Automatic stabiliser
-4
-5
-6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
9
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Efficient stabilisation requires:
• Capacity to respond to symmetric and asymmetric
shocks
– Vertical flexibility responds to symmetric shocks
– Horizontal flexibility responds to asymmetric shocks
• Reflect collective preferences about the
intergenerational burden sharing
10
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Vertical flexibility
• In EMU the appropriate response to symmetric
shocks are determined by the interaction
between monetary and aggregate fiscal policy
– At the moment fiscal policy is constrained by Excessive
deficit procedure
– Balanced structural budgets are not realised
– the main burden is on monetary policy
• Performance since the start of EMU has been
benign
– Shocks have been less severe
– What about the future?
11
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Figure 4. Euroland output gap and economic shocks
0.03
output gap (deviation from potential)
forcast error LeuroGDP(L8)
0.02
0.01
0.00
-0.01
-0.02
-0.03
-0.04
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
12
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Horizontal flexibility
• Asymmetric shocks also have been less
severe
– Are symmetric shocks disappearing in EMU?
– Danger of heterogeneous collective preferences
if political system does not allow collective
deliberation and choice
13
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Euro
0.04
0.035
German unification
0.03
0.025
0.02
0.015
0.01
standard deviation
Bretton Woods
0.005
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
0
1962
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
-0.01
-0.02
Euro area grow th rate
Standard deviation Euro area grow th
Standard deviation EU15
1960
growth rate
Figure 4. Asymmetry of shocks in Euroland
14
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Horizontal flexibility can be achieved by
• Intertemporal transfers
– Regional governments borrow to sooth income
– Constrained by SGP
• Interregional transfers
– Federal system compensates asymmetric shocks
– E.g. Länderfinanzausgleich
15
Professor
Stefan
Collignon
Europe’s fiscal Constitution
• In the EU interregional transfers do not
reflect asymmetric shocks
• EU interregional transfers exclusively
follow a redistribution logic
– EU budget redistributes income to farmers and
poor regions
16
Professor
Stefan
Collignon
Europe’s fiscal Constitution
• Asymmetric shocks lead to transnational
intertemporal borrowing
– The mode of financing the EU budget causes
distortions in national budget policies
– EU budget is financed by a levy on national
budgets
– Net contributors use domestically raised
income for expenditure elsewhere
– Hence, they borrow for others
17
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Table 1. European net contributions and budget deficits 2002
in percent of GDP
Portugal
FR. Germany
France
Greece
Italy
Austria
Belgium
Spain
United Kingdom
Ireland
Netherlands
Sweden
Denmark
Finland
Net contribution Cycle deficit Structural deficit
NC
SD
2.08
-0.24
-0.14
2.40
-0.23
-0.10
-0.10
1.27
-0.17
1.22
-0.49
-0.29
-0.09
0.00
0.02
-0.15
0.56
1.31
-0.01
-1.43
-1.54
-0.12
1.18
3.16
2.11
1.06
1.33
0.44
-2.72
-3.37
-3.66
-1.46
-2.30
-0.15
0.02
0.21
-1.41
-1.87
-2.05
0.81
1.11
3.75
SD-NC actual deficit AD-NC
AD
-4.81
-3.13
-3.52
-3.86
-2.07
-0.04
0.12
-1.07
-1.24
-3.09
-1.56
1.10
1.20
3.76
-2.71
-3.52
-3.10
-0.16
-2.31
-1.58
-1.52
0.09
-0.24
1.29
0.05
1.87
2.44
4.20
-4.79
-3.28
-2.96
-2.55
-2.08
-1.47
-1.43
-1.18
-0.06
0.07
0.54
2.16
2.53
4.20
18
Professor
Stefan
Collignon
Europe’s fiscal Constitution
For example:
• Germany’s net contribution is 0.24% of GDP
– Its actual deficit in 2002 was 3.53%
– Without Net Contribution: 3.28 %
• France: Net Contribution of 0.14 %
– Actual deficit 3.10 %
– Without net contribution: 2.96 %
• Portugal received net contribution of 2.08 %
– Actual deficit: 2.71
– Without net contribution: 4.79 %
19
Professor
Stefan
Collignon
Europe’s fiscal Constitution
This system is unsustainable !
• National finance ministers will wish to reduce net
contributions
• especially when under the pressure of reducing
deficits under the SGP
• The European Union will have less and less the
financial means to implement its policies
 Europe’s present fiscal constitution carries the
risk of European Disintegration
20
Professor
Stefan
Collignon
Europe’s fiscal Constitution
• What is the solution?
• We need to integrate fiscal policy at the European
level
–
–
–
–
Integrate national and EU budgets
Define aggregate fiscal policy stance in Euroland
Finance EU budget by Euro-tax
Create democratic input legitimacy in addition to efficient
output legitimacy
21
Professor
Stefan
Collignon
Europe’s fiscal Constitution
• Defining the aggregate fiscal policy stance
– Top down: define the aggregate deficit that is desirable
given the economic environment
– Vertical flexibility
• Give democratic legitimacy to this choice
– If EU policy stance must have authority over partial
national preferences, it requires a vote reflecting all
European citizens
– European Parliament should vote macroeconomic
framework law: BEPG
– Democratic debates will transform collective preferences
 Josef Christl: “dialogue will help bridge the gap between political
European elite and European citizens”
22
Professor
Stefan
Collignon
Europe’s fiscal Constitution
• Assign deficit quota to decentralised
jurisdictions
–
–
–
–
Horizontal flexibility
Tradable deficit permits most elegant solution
Solves problem with “domestic stability pacts”
Makes decentralised fiscals decisions accountable
and coherent with monetary policy
23
Professor
Stefan
Collignon
Europe’s fiscal Constitution
• Reform the financing of EU Budget
– The “own resources” must become own resources
– Introduce Eurotax
•
•
•
•
Vat
Corporate tax
Capital income
Energy tax
– Make the European Parliament responsible for taxing and
spending
• Only European-wide debates can foster European collective
preferences for public goods
• Co-legislation with Council as there may exist esternalities
24
Professor
Stefan
Collignon
Europe’s fiscal Constitution
To summarise
• Europe’s fiscal constitution is severely handicapped
• The Constitutional Treaty does not remedy
• With the single market and the euro European
citizens share many more public goods, their
res publica
• These goods need an efficient and democratic
common management
25
Professor
Stefan
Collignon
Europe’s fiscal Constitution
Conclusion
Ceterum censeo:
pactum stabilitatis esse delendum
Et rem publicam europaeam esse errigendam
26