FISCAL COORDINATIONEU ECONOMIC GOVERNANCE

18.01.14

TEODOR KALPAKCHIEV

THE EUROPEAN CENTRAL BANK Art. 127 TFEU / Art. 2 Statute of ECB – Primary

objective: To maintain price stability

Inflation Targeting = Price Stability

Governing Council: "Price stability is defined as a year-

on-year increase in the Harmonised Index of

Consumer Prices (HICP) for the euro area of below 2%.“

Medium-term orientation

Counter shocks /demand nature, cost-push nature/

Decisi

on –

Makin

g

Executive

Board

Implementation of Monetary

Policy

Daily Maintenance

President, Vice, 4 other

Members (8)

Governing

Council

Main decision-making body

Executive Board + Governors

NCB (18)

General

Council

Transitional Issues

President, VP, NCB Governors

of all MS (28)

OPTIMUM CURRENCY AREAS

Necessary

Requirements Labour

Mobility

Full Implementation

Freedom of movement, workers’ rights,

institutional arrangements

OpennessPrice and wage flexibility

Wage Flexibility ?

Risk-sharing

system

Automatic fiscal transfer mechanism /

Solidarity /

No-bail out clause in the Stability and

Growth Pact

Separate arrangement – EFSM / ESM

Joint central

bank

Corrective Mechanism

Contain Inflation

Promote growth through interest rates

- Maximize economic efficiency

- Optimal characteristics for

emergence of a currency zone

- Conceived by Robert Mundell

THE IDEAL (CASE)

• Centralization of budgets of MS (Federal

Budget)

• European Social Security System

• Income taxes levied by an European

Government

• Variables: Demand, Output, Income tax

revenues, social security contributions,

unemployment

• Additional benefit: Fragility of (a

presumptive) Bond Market is reduced

• Pooling the Issue of governmental bonds

• Ability to control the currency in which the

debt is issued

• Critique

• Moral Hazard

• Ratings and International Borrowing

• Differentiation of debt into below (blue) and

above (red) 60% of GDP (Grauwe, Moesen,

Bruegel)

IN REALITYNo centralization of national

budgets

Countries experience asymmetric

shocks

Increase borrowing = Increase

External Debt

Implications:

• Centralize budgets to reduce

fragility

• If not, flexibility of national fiscal

policies should be allowed

SIX PACKFive Regulations and one Directive /all MS/

Fiscal and macroeconomic surveillance

Operationalizes the debt criterion

Interest bearing deposit 0.2 % (up to 0.5%) GDP

Reverse QMV

Two-Pack (I.F. 30.05.13): 1) Budgets

3 year budget plans and draft budgets to be approved by EC and the Eurogroup

Analyses whether in line with E.Semester and GSP – opinion or a revised draft

SIX PACKTwo-Pack: 2) Financial difficulties

EC decides on Euroarea MS, ESM MS –

auto

Involves: address the sources of

instability, review missions, quarterly

reporting from EC to Eurogroup

MS might seek technical assistance

(Task Forces)

Council may decide the MS does not

comply with the adjustment program –

disbursements

(Draft) post-programme surveillance as

long as it has not repaid 75% of its

debt

MACROECONOMIC IMBALANCE PROCEDURE

• Introduced Autumn 2011

• Part of the Six-Pack

• Indicators are not interpreted directly

• EC determines if imbalances exist and what is their nature

• Not severe: Incorporated in the European Semester – Preventive Arm

• Severe: Corrective Arm

• Surveillance and Regular Progress Reports

• Enforcement (up to 0.1% GDP), if the country fails to deliver a corrective plan or the agreed actions

1st Alert Mechanism Report in

February 2012 – Preventive Arm

Belgium, Bulgaria, Cyprus, Denmark,

Finland, France, Italy, Hungary,

Slovenia, Spain, Sweden and the

United Kingdom.

2nd Alert Mechanism Report in

November 2012 – excessive

imbalance in Spain and Slovenia, but

not triggered

3rd Alert Mechanism Report –

widened: Germany, Croatia and

Luxembourgh

THE EURO + PACT

• Adopted in March 2011

• Tax Policy Coordination only as

commitment

• Four Main Goals

• fostering competitiveness

• fostering employment –

flexicurity, lowering taxes on

labour, targeting older

workers, limit early retirement

• sustainability of public finances

on national and sub-national

level

• reinforcing financial stability

• Abolish wage indexation – not compensate for inflation, less expensive to employ people / less purchasing power

• Common Corporate Tax – reduce administrative burden / detract from competitiveness in certain countries

• Raising Pension Age – Revenues and less burden on social security funds / social costs

• Adopting debt brakes (as in Switzerland and Germany)

• Promote flexicurity

• Private debt

THE EUROPEAN SEMESTER

• Pre-Phase: November/December:

• Annual Growth Survey – policy priorities

• Alert Mechanism Report – macroeconomic development

• EC may decide to conduct in-depth review

• 1st Phase: January/February:

• Council discusses it in different formulations

• EP too and publishes opinion on employment guidelines

• Economic dialogue with other actors

• March:

• E. Council – policy orientations

• EC – in-depth review of marcro imbalances

• EC may draft recommenations

• April: MS submit their

• Stability or Convergence Programmes

• National Reform Programmes

• May/June: EC evaluates and issues recommendations, the Council discusses them, the European Council endorses them

• June/July: Country-specific recommendations are adopted by the Council

FUTURE

• Eurobonds

• Convergence and Competitiveness Instrument /Structural reforms contractual agreement/

• Build on MIP, a filter for major reforms eligible to be accompanied by fin. support

• Financial Transaction Tax

• Single Supervisory Mechanism /European Banking Authority/

• Single Resolution Mechanism

THANK YOU.