Fiscal rules for the eurosystem from “free talk” to effective incentive schemes vox, cepr policy po

How about existing fiscal arrangements?

Created within the Maastricht Treaty, the SGP targets discipline in public areas budgets, primarily with a complicated excessive deficit procedure. It hasn’t been executed and was loosened in 2005. National ministers deciding by qualified majority and getting the final say have preferred a cooperative approach up to now – because so many students would if deciding collectively who’ll pass their exams. The EU is finalising another SGP reform. You will have a fresh preventive part, but probably no automatic sanctions (Kafsack 2011).

  • Pact for the euro

Designed in March 2011, this instrument should foster national competitiveness, employment, stable public finance, and financial stability through, for instance, improved national education systems, labour-market reforms, debt brakes, expenditure rules, etc (Consilium 2011, Annex 1). Sceptics are the Economist (2011a) and observers such as for example Gros (2011) on this website who criticise the entire lack of means and sanctions for implementation.

This strategy produced by the European Commission (2010) replaces the Lisbon Technique for Europe between 2000-2010 which has basically failed. Europe 2020 presents precise targets for most national areas, e.g. higher employment rates, more R&D-spending, better environment, and less poverty. Here again though, precise sanction mechanisms are entirely missing.

  • European Semester

Introduced by the Council of the EU (2010) and first implemented in 2011, this annual early-warning system strives for long-term fiscal coordination. Predicated on a Commission report, the Council of Ministers and the European Parliament give political advice. Member states should then review their medium-term budgetary strategies and deliver reforms. For the national budget planning of the year ahead, the European institutions provide political advice.

Up to now, the EU’s political recommendations aren’t legally binding. Heinen (2010) thinks their publication may put more peer pressure on national ministers and become interesting to bond markets. But within SGP, peer pressure and pure publication instruments have ultimately failed.

  • European summit in July 2011

Here, the Council of the EU (2011) was very precise on additional financial help for Greece and the European Financial Stability Facility. Regarding fiscal policy coordination, it just recapitulated the ongoing initiatives for stronger discipline and EU surveillance (Council of the EU 2011) without including additional ideas on how best to enforce these targets.

In conclusion, none of the prevailing fiscal agreements is strict enough to improve budget behaviour of national governments.

Which options for effective incentive schemes are under debate?

  • National debt brakes

They were proposed by Chancellor Merkel and President Sarkozy in August 2011 (see for example Curtis 2011). Debt brakes are fashionable: – following a International Monetary Fund (2009, p. 7), national fiscal rules of any sort went up from seven in 1990 to about 80 in early 2009. However, they often include exceptional clauses and you will be executed later on. An average example is Germany’s constitutional debt brake. The issue of enforcing non-automatic rules are most likely the most obvious regarding the US’s legal debt ceiling that was raised for the 75th amount of time in August 2011 (The Economist 2011b).

  • European economic government

Also suggested by Merkel and Sarkozy in August 2011 (see Curtis 2011), this still very blurry idea could comprise specific things like taxation at the European level, Eurobonds or a European Commissioner of Finance.

French or Spanish governments have traditionally favoured a European economic government, whereas those from Germany or the uk, for example, have up to now rejected this integrative step. It could require unanimous consent and a far-reaching self-disempowerment of national parliaments. It is very unpopular in Germany where, for example, 76% of the populace recently opposed Eurobonds (EU-Info Deutschland 2011). Finally, it could lack democratic legitimacy as there is yet no true European government elected by the European Parliament.

  • Independent institution for fiscal supervision

These initiatives run under different labels, for example “independent fiscal councils” (The Economist 2011b). All have a very important factor in common: they might become more credible and more in a position to enforce fiscal rules than politicians under a re-election constraint. But who represent this independent body? National politicians or civil servants appointed in mutual consent by the heads of state, or government as in case there is the ECB’s executive board? Members of the European Commission? So long as they may be re-appointed (as regarding Commissioners), so long as they might be young enough to keep their career elsewhere (as regarding ECB members and Commissioners) and so long as they might have close links with their national government (as regarding both again), the institution wouldn’t normally be completely impartial.

  • Withdrawal of voting rights in the Council of Ministers

This notion has been popular for several years in regards to to a reinforced SGP. Of course, it could not solve the essential problem. If one applies again the analogy of students deciding independently who’ll pass the exam, the performing students could hesitate to let their peers fail, because they would fear becoming an underperformer themselves within the next round.

  • Credit against collateral from insolvent euro members

Carrying out a Finnish initiative (see for example Mußler 2011), proposals which range from national gold reserves to public holdings of company’s shares are actually publicly debated (Spiegel 2011). But maybe there is sufficient collateral for each and every lender to cover the complete credit risk? Presumably not. Are gold reserves managed by the central banks? Probably yes. Up to now, these independent national organisations haven’t any incentive to provide their reserves away. However they could be forced to take action by the ECB to pay it’s purchases of government bonds.

In summary, the primary initiatives under debate, even if implemented in a short time, lack incentives to lessen public debt in the Eurosystem. The only fairly realistic and credible approach is to pass national collateral, especially gold, from the borrowers to lenders.

Effective incentive schemes for fiscal discipline

They might comprise automatisms and other politically independent decision-making. Below are a few examples (for details see Kuhn 2011):

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