Presented by Daniel Gros Public Hearing on Institutional Aspects of the New Rules on Economic Governance and the Role of the EUROGROUP European Parliament,

Presented by Daniel Gros

Public Hearing on Institutional Aspects of the New Rules on Economic Governance and the Role of the EUROGROUP

European Parliament, May 5

Centre for European Policy Studies • www.ceps.eu

What is the rationale for

EMU Governance and Economic Coordination

• The EMU governance system

• Economic policy coordination and

spillovers

• Conclusions

2Centre for European Policy Studies • www.ceps.eu

Outline

• Rule-based system with complex procedures.

• A complex set of rules:

– Six-pack

European Semester

– Two-pack

– (The forgotten) Treaty on Stability, Coordination and Governance

• For the EA MS but also the other EU countries

• Different actors, competences and degrees of accountability

• Overall aim of recent changes: strengthen economic

coordination and surveillance (EC document 2010)


EMU Governance System (I)

3

“The crisis exposed fundamental problems and unsustainable trends in many European countries. It also made clear just how interdependent the EU's economies are. Greater economic policy coordination across the EU will help us to address these problems and boost growth and job creation in future”.European Commissionhttp://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/priorities/economic-governance/index_en.htm

=> No crisis no interdependence?Centre for European Policy Studies • www.ceps.eu

EMU Governance System (II)

4

http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/priorities/economic-governance/index_en.htm




EU c

onst

rain

ts o

n na

tiona

l eco

nom

ic

polic

ies

High

Low

Risk & size of spillover effects HighLow

EDP and MIP for excessive deficits and imbalances

Coordination and surveillance of

fiscal and macroeconomic

policies

Enhanced surveillance of MS

under financial stress

Adjustment programmes under ESM

A representation of EMU economic governance

• Major threats to systemic stability arise

from fiscal imbalances (EDP) and

external and financial ones (MIP)

• Rules to limit risks, and economic policy

coordination to face spillovers

• Our focus: spillovers.


Two fundamental assumptions of the governance system

6

• In terms of crisis, the external position of a country might be as important as the fiscal position.

• Justification for coordination is the existence of spillover effects.

• Do we know they work?


Two fundamental criticisms

7

• The economic rationale for policy coordination (and ‘corrective action’) is that idiosyncratic shocks in one country impact demand/employment in other countries and the entire union.

• What do we know about spillovers?– They differ according to the state of the economy– Depend of fiscal/external position of the country– Depend on the stability of the financial system


Spillover effects in a Monetary Union (I)

8

• Different shocks need to be considered:

• Fiscal policy (deficit spending)• Growth policy (increase in

productivity)• (not policy): level of public debt


Spillover effects in a Monetary Union (II)

9

Relevant

Variable

State of the Economy

Sovereign Debt (high debt)

Fiscal policy (deficit up)

Growth:Productivity enhancing

Normal times no ? ?

Zero interest

rate (policy rate)

no + ?

Crisis times:

High risk premia - - - - - ++

Spillover effects in a Monetary Union

• Assumption:– No confidence problems – Debt level irrelevant within certain limits– No ZLB problem

• Higher deficit has two effects: demand increases and interest rates increases => net spillover effect uncertain

• Effect of higher productivity on other countries also uncertain (Investment, competitiveness and L-mkt channels)


Regime: Normal times

11

Relevant

Variable


Sovereign Debt

Budget balance

Growth

Normal times no ? ?

Zero interest

rate no + -?

Crisis times:

High risk premia - - - - - ++

• Debt level irrelevant • Fiscal deficit:– Positive spillover: demand channel dominates

• Effect of higher productivity on rest of union: competitiveness channels might dominate with sluggish wages

Þ Negative spillover effect from structural reforms?


Regime:Zero interest rate

12

Relevant

Variable


Sovereign Debt

Budget balance

Growth

Normal times no ? ?

Zero interest

rate no + -?

Crisis times:

High risk

premia

- - - - - ++

• High risk premia• Debt matters• Deficit: Confidence effect potentially important

=> spillover strongly negative BUT

• opposite policy may also have short run negative effect on debt ratio: self-defeating austerity?

• Productivity positive spillover because of confidence

• Overall the size of spillovers depends of the resilience of financial system


Regim:Crisis times

13

Relevant

Variable


Sovereign Debt

Budget balance

Growth

Normal

times

no ? ?

Zero interest

rate

no + ?

Crisis times:

High risk

premia

- - - - - ++

• Complex system of rules • Rules remain the fundamental pillar of the

system– Questioning them = questioning EMU

• Economic rationale for coordination may lack robustness

• Clarify what coordination is • The perception that Brussels knows what is

best is hard to accept if the approach imposed does not deliver (output legitimacy)


Conclusions

14

Thank you!

15Centre for European Policy Studies • www.ceps.eu

Documents

Presented by Daniel Gros Public Hearing on Institutional Aspects of the New Rules on Economic Governance and the Role of the EUROGROUP European Parliament,