Fiscal Governance in the Eurozone€¦ · Ifo InstituteIfo Institute Fiscal Governance in the...
Transcript of Fiscal Governance in the Eurozone€¦ · Ifo InstituteIfo Institute Fiscal Governance in the...
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Ifo Institute Ifo Institute
Fiscal Governance in the Eurozone Clemens Fuest Ifo Institute and University of Munich
Franco-German Conference, Paris, July 7-8 2016
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Ifo Institute
1. Fiscal Union and the relationship between liability and control
2. The existing fiscal coordination and supervision does not work
3. Accountability Bonds
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Ifo Institute
1. Fiscal Union and the relationship between liability and control
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Ifo Institute
4
Fiscal Policy Governance in Europe
Control over Fiscal Policy
Liability for government debt
European National
European Centralised Fiscal Union
Status Quo?
National Treaty of Maastricht?
Decentralised Fiscal Union
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Ifo Institute
2. The existing fiscal coordination and supervision does not work
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Ifo Institute
European Stability and Growth Pact:
„…adherence to the medium-term objective of budgetary positions close to balance or in surplus will allow Member States to deal with normal cyclical fluctuations while keeping the government deficit within the 3 % of GDP reference value;.“* *(VERORDNUNG (EG ) Nr. 1466/97 DES RATES vom 7. Juli 1997 über den Ausbau der haushaltspolitischen Überwachung und der Überwachung und Koordinierung der Wirtschaftspolitiken, Erwägungsgrund (4).
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Ifo Institute
Experience with Fiscal Policy Supervision in Europe
• 1999-2014: 159 violations of the 3% deficit limit
• 50 violations happened in recession years (negative growth rate)
• 109 violations happened in years without recessions
• Number of sanctions: 0
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Ifo Institute
0
2
4
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8
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12
14
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18
Source: Own calculations, European Commission
Violations of Maastricht Treaty 1999-2014 (3% Budget Deficit Ceiling)
Overall allowed because of recession not allowed
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Ifo Institute
Has this improved since the debt crisis?
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Ifo Institute
European Fiscal Pact:
Article 3 (1)
(a) the budgetary position of the general government of a Contracting Party shall be balanced or in surplus; (b) the rule under point (a) shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0,5 % of the gross domestic product at market prices. The Contracting Parties shall ensure rapid convergence towards their respective medium-term objective.
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Ifo Institute
-4
-3,5
-3
-2,5
-2
-1,5
-1
-0,5
02012 2013 2014 2015 2016 2017
Data: European Commission Winter Forecast 2016
Structural Budget Deficit and Fiscal Pact 2012-2017
Fiscal pact France ItalyNetherlands Portugal Spain
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Ifo Institute
-4
-3,5
-3
-2,5
-2
-1,5
-1
-0,5
02012 2013 2014 2015 2016 2017
Data: European Commission Winter Forecast 2016
Sturctural Budget Deficit and Fiscal Pact 2012-2017
Fiscal pact France ItalyNetherlands Portugal Spain
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Ifo Institute
Example of how the ‘European Semester’ works:
Stability program France 2013
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Ifo Institute
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
2014 2015 2016 2017
Source: European Commission.
Structural deficit France as announced in stability program 2013 % des BIP
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Ifo Institute
Comment of the European Council on July 9 2013:
Given the high and further increasing level of public debt and given the fact that the correction of the excessive deficit has again been postponed, to 2015, it is all the more important that the budget 2013 is implemented strictly and that significant consolidation efforts will be undertaken in the following years.
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Ifo Institute
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
2014 2015 2016 2017
Data: European Commission.
Structural Deficit France 2014 - 2017 % des BIP
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Ifo Institute
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Ifo Institute
3. Accountability Bonds*
* Fuest, Heinmann, Schröder (2016)
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Ifo Institute
• Accountability bonds are junior government bonds
• All existing government bonds are senior relative to
acc. Bonds, no changes for senior bonds
• Accountability bonds have (various) automatic triggers for restructuring
• The ECB does not buy accountability bonds
• Accountability bonds are standardized (5 year maturity)
• Positive risk weights in banking regulation
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Ifo Institute
Trigger Type of restructuring
Debt exceeds 120% of GDP
Automatic prolongation, interest moratorium,
Country starts ESM programme
Total loss
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Ifo Institute
When is a country required to issue Accountability Bonds?
• European Fiscal Pact is used as starting point:
Structural deficit should not exceed 0,5% of GDP
• If a country exceeds that limit with its current deficit, the excess deficit is financed with Accountability bonds
• Example: Structural budget deficit of Spain 2017 (forecast): 2,5% of GDP; 2% of GDP are issued in the form of accountability bonds
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Ifo Institute
• Intuition: If a country exceeds debt levels beyond
jointly decided level, it needs to bear the full cost, no ‘subsidization’ of debt via joint liability (analogy to ‘polluter principle’ in environmental economics)
• Option: Countries build up a buffer of Acc. Bonds in ‘good’ times that reduce obligation to issue them in bad times.
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Ifo Institute
Accountability Bonds: What are their particular advantages? • Gradual step towards credible sovereign debt
restructuring
• Avoid risk of destabilising large parts of existing bond markets by focusing on debt flows not stocks
• Restore market discipline at the margin without increasing the cost of refinancing the existing stock of debt
• Give greater relevance to fiscal policy coordination at the EU level
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Ifo Institute
What is the difference to existing proposals for debt restructuring?
• Accountability bonds focus on flows (yearly deficit)
rather than stocks of debt
• Blue Bond Red Bond Proposal (Delpla/Weizsäcker): Converting 60% of the stock of debt into senior debt would impact on the remaining stock of (red bond) debt
• German Council of Economic Advisers: Debt Redemption Pact: Stock based approach, 60% of GDP remaining under national control
• Mody (2013): ‘Sovereign Cocos’, transformation of the stock of debt
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Ifo Institute
Thank you very much