Transcript Forecasting Greenhouse Gases: Ireland

The Stability and Growth Pact:
How Much Co-Ordination?
John Fitz Gerald and Adele Bergin
The Economic and Social Research Institute
www.esri.ie
Fiscal Policy under EMU


EMU changed things
Channels for transmission:
• Financial system
• Debt default
• Inflation and Interest rates

Fiscal Policy Regime – SGP: its role
• Is it effective in preventing unwise policy?
• Does it respect subsidiarity?
Financial Stability



All have interest in financial stability
ECB action to handle regional crisis?
Who would handle a regional crisis?
Danger of Default
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Pisani-Ferry – If solvency only
concern – debt criterion alone
What level of debt?
Investment in Infrastructure
• Different long-term implications
• Produces a “return”
• Intergenerational equity
Ir
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an
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Fr
an
D ce
en
m
ar
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G
la
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Sp
a
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ce
ga
re
e
rt
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Po
G
Investment, share of GDP 2001
30
25
%
20
15
Public Investment, % of GDP
2000
Portugal
Poland
Netherlands
United Kingdom
Ireland
France
Finland
Spain
Denmark
Germany
Belgium
0
1
2
3
4
5
6
Government saving % of GDP
2001
UK
Spain
Portugal
Italy
Ireland
Germany
France
Denmark
Belgium
EU 15
-1
0
1
2
3
4
5
6
Dangers of Inflation


Effect of fiscal policy changed by EMU
Fiscal Policy Under 3 Regimes:
• Independent Monetary Policy
• EMS
• EMU

Example:
• Fiscal Stimulus in Germany: 2% of GDP
• Using NiGEM
Effect on Interest rates
%
Change compared to base, % points
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2003Q2
2007Q2
2011Q2
Euro - Euro Regime
2015Q2
2019Q2
DM and FR - EMS Regime
Effect on German GDP
Change compared to base, % points
2
1.5
%
1
0.5
0
-0.5
2003Q2
2007Q2
2011Q2
Germany - Euro
2015Q2
Germany - EMS
2019Q2
Effect on French GDP
Change compared to base, % points
0.2
0
%
-0.2
-0.4
-0.6
-0.8
2003Q2
2007Q2
2011Q2
France - Euro
2015Q2
France - EMS
2019Q2
Under EMU
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Only small negative spillover
Inflation effect small
Interest Rate effect small
True for fiscal stimulus in other
members
Results

Under EMU:
• Unwise fiscal policy in one regional
economy has limited scope to damage
the Euro area economy.

Under EMS
• Unwise fiscal policy in Germany could
have serious negative effects elsewhere

The SGP is the child of the EMS
Domestic Fiscal Policy



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The cost of a fiscal war of attrition?
Example of Finland
Would it be different for France &
Germany?
Rapid adjustment – lower cost?
Maybe SGP is sensible rule for
individual countries
Conclusions


Enforce the SGP first?
Replacement for the SGP
• Should respect subsidiarity
• Protect against real potential dangers –
Danger of default
• Debt criterion or Modified “Golden Rule”?
– Blanchard and Giavazzi

How strong a rule?