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A Sustainability Pact for the Eurozone

A Sustainability Pact for the Eurozone. Benoît Cœuré and Jean Pisani-Ferry February 2003. The Current Fiscal Debate. The Eurozone since 1999: learning-by-doing on policy framework Recent steps in the fiscal field: Recognition of role for automatic stabilisers

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A Sustainability Pact for the Eurozone

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  1. A Sustainability Pact for the Eurozone Benoît Cœuré and Jean Pisani-Ferry February 2003

  2. The Current Fiscal Debate • The Eurozone since 1999: learning-by-doing on policy framework • Recent steps in the fiscal field: • Recognition of role for automatic stabilisers • Structural deficit path (-0.5% per year) • Ongoing work on « close to balance » concept • Commission proposals on implementation of SGP, coordination, and institutions

  3. Three Issues • How to implement fiscal discipline? (reforming the SGP) • Is policy coordination needed? • What role for EU institutions? Discipline and coordination frequently confused: • Discipline addresses spillovers from excessive deficits/debts (agreement on principle, discussion on design) • Coordination addresses other channels of interdependance (issue of principle as well as design)

  4. What’s Wrong with the SGP SGP is increasingly challenged for: • Weak analytical foundations • Excessive short-term focus • Wrong incentives • No regard for quality of spending • Disputable zero deficit target • One-size-fits-all • Poor implementation and lack of ownership

  5. Reform Proposals • Status-quo ante (« Right or wrong, our pact ») • ECB, Commission until 2002 • Revolution (« Abolish the pact, change the institutions ») • Wyplosz, Casella • Reform (« Keep the goals, amend the rules ») • Elaboration on golden rule: Blanchard and Giavazzi • Elaboration on sustainability: Buiter and Grafe • Muddling through (« Keep the rules, soften the interpretation ») • Commission since 2002, Buti et al.

  6. A Sustainability Pact: Principles and Implementation • Dangers of muddling through: too much discretion in sustainability assessment • Trade-off between economic soundness and tractability • Accomodate increasing EU diversity in terms of nominal growth, initial debt, investment needs, pension gap, etc. • « Basle 2 approach »: move away from uniform numerical targets towards common principles with decentralised implementation • Introduce new Pact as a voluntary option alongside existing SGP

  7. A Sustainability Pact:Three Building Blocks • Sustainability assessment to be based on comprehensive public sector balance sheet • Common methodology and statistical infrastructure (new ESA95) • Decentralised implementation subject to EU approval • Periodic revisions to take into account structural reforms (e.g. pensions, tax reform) and changes in economic assumptions • Derive Maastricht-type debt target from sustainability assessment • Wealth-stabilising debt ratio (WSDR), or • Debt target to be based on country « rating » category, avoiding frequent jumps in target value • Fiscal policy rules over the cycle

  8. Coordination • Still controversial (results are model-dependent) • Practical motives: • Uncertainty on ECB reaction function • Eurozone policy mix may matter (impact on exchange rate, current account; need to equip for Japan-type scenario) • Way forward: • More transparency and predictability (code of conduct, contingent rules in stability programs) • QMV in Eurogroup on joint actions

  9. Institutions and Governance • Current set-up: confusion of responsibilities • ECOFIN enacts both legislation and policy • Eurogroup has no defined mandate • Commission looking for a role • Enlargement to be a stress test. Way forward: clarify distinction between: • Rules-setting (ECOFIN), • Adaptation of rules (Eurogroup/Euro-ECOFIN), subject to call-back procedure by non-euro member states • Policy decisions (Eurogroup) • Independent surveillance (Commission)

  10. Conclusion • EMU basic principles in no need for reform, but weaknesses in implementation • Reform needed before Eurozone enlarges

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