Workshop organised by the Directorate-General for Economic and Financial Affairs of the European Commission , Brussels, 27 November 2009
The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising a one-day workshop on 27 November 2009 in Brussels.
The aim of the workshop is to improve our understanding of the intertwining between public finances and external imbalances in the euro area.
The economics literature suggests that with globalisation and the intensification of international trade and capital flows countries tend to experience growing divergence in their current account performances, thanks to increased capital flows between creditor and debtor countries. Such increased trade and financial integration might thus lead to the building up of large external imbalances heightening the costs associated with the risk of sudden stops in external debt-financing capital flows provoked by the occurrence of large macroeconomic shocks such as the current financial crisis. Existing evidence also shows that countries facing such sudden stops often relied on exchange rate adjustment to restore competitiveness and promote export-led recoveries following the advent of major economic downturns. Such mechanisms, however, no longer exist for euro area countries, providing further prominence to fiscal policy as macroeconomic adjustment device for preventing the building up of external imbalances and smoothing the adverse effects of post-crisis adjustment process on prices and economic growth. In particular, dynamic internal demand favoured by the credit expansion and property prices appreciation has led some euro area countries (such as Ireland or Spain) to experience growing current account deficits, appreciating real exchange rates and significant increase in net foreign liabilities prior the outbreak of the current financial crisis. Other countries (such as Germany or the Netherland) have, on the contrary, benefited from dynamic export-led growth but appeared also exposed to the sudden halt in world trade with disruptive consequence for public finances and economic growth. Outside the euro area, many Recently Acceded Member States experienced significant real exchange rate appreciation and fast deteriorating current account balances increasing their exposure to the financial crisis and the sharp cyclical downturn that followed.
Recent evolutions related to the financial crisis thus raise questions about the way fiscal policy can help prevent the build-up of large external imbalances during booms and assure greater resilience during downswings in EU countries. The existing literature on current account dynamics and their link to fiscal policy for countries belonging to economic and monetary unions is relatively scant, however.
With a view to improving our understanding of these issues and derive policy implications in the context of the euro area, the Commission invites the submission of contributions addressing the following questions:
How can fiscal policy facilitate pre and post-crisis macroeconomic adjustment in countries with dynamic internal demand, and thus prone to experience current account deficit, and in countries with good export performance which are more inclined to experience current account surpluses? In particular what has been the role played by fiscal policy in the diverging trade balances and real exchange rate evolutions EU countries prior to the outbreak of the financial crisis? What is the appropriate fiscal policy response in order to create a sufficient safety margin during good times in countries to accommodate debt increases during bust phases without incurring into deep post-crisis adjustment process?
EU countries differ in terms of economic structures, potential for catching-up and export performance. In the case of euro area countries, the loss of the exchange rate as adjustment mechanism may, in particular, have asymmetric consequences depending on countries' specific characteristics and, in particular, imply protracted periods of self-reinforcing dynamics due to price and wage rigidities. More generally, the destabilising role of differences in economic structures can sometimes be magnified by inappropriate tax policies providing wrong economic incentives, for instance, regarding housing investment during periods of protracted low interest rates and credit expansion as experienced in the EU till 2007. In such context, how can the design of tax policies be improved in order to avoid further nurturing external imbalances either through internal demand (and asset price booms) and, more generally, prevent the disruptive consequences of large external imbalances reversals? More specifically in the case of catching-up economies, how can public finances and tax policy help providing the right (microeconomic) incentives to help to tame down buoyant investment in non-productive capital (housing) during boom periods?
Broader surveillance based on a wider set of indicators taking into account differences in current account and competitiveness dynamics could provide useful signalling devices for the ability of countries to adjust to large external shocks such as the current financial crisis. The question remains open however, regarding the way external imbalances and real exchange rate differentials can be better monitored in the context of the euro area fiscal surveillance framework. Due consideration should also be given also to euro area and EU –wide risks of contagion and greater exposure related to external imbalances and the way EU fiscal policy setting could be adapted to these potential risks and heightened inter-dependence.
The workshop will include 6 to 8 papers to be presented, followed by the comments of discussants and a general exchange of views among the participants.
The final papers will have to be original work created in response to this call for papers and should roughly be 15,000-20,000 words in length.
Selected authors will be required to send electronically a full draft of their paper to DG ECFIN by 1 November 2009 and to present it to the workshop. The final version of the paper should be submitted electronically by 29 January 2010.
In accordance with the conditions of the purchase order , the Commission intends to pay a fee of € 4,000 per paper and to cover travel and accommodation expenses as well as a daily allowance for one speaker per paper, irrespective of whether the paper is authored or co-authored.
We invite the submission of abstracts or annotated outlines (one to two pages) of preliminary papers related to the above mentioned issues. Papers can be co-authored ( proxy form co-author ).
Paper outlines together with a curriculum vitae (including the co-author's) should be submitted electronically to the e-mail address ECFINfirstname.lastname@example.org, clearly mentioning in the subject line of the e-mail the topic of the paper.
This mailbox is reserved solely for submissions. Submissions sent to other mailboxes or to Commission staff cannot be accepted. No other communication should be addressed to this mailbox.
Deadline for submission : 30 June 2009 (10:00 CET)
The selection of the papers will be based on the following criteria:
A selection committee will be set up to evaluate the submissions. The selection procedure is expected to be completed by mid-July. Candidates will be informed in due time of the outcome of the selection procedure.
Conditional on the quality of the papers, they could be published in a volume collecting the workshop proceedings. The Commission will retain the copyright.