12/11/2004 : FISCAL SURVEILLANCE IN EMU: NEW ISSUES AND CHALLENGES

Brussels, 12 November 2004

Theme

The analysis and surveillance of fiscal policy in EMU evolves over time. This evolution is driven partly by efforts by European policy-makers to upgrade the quality of budgetary surveillance and partly by the emergence of new issues to be tackled. Examples of significant adaptation include the use of cyclically-adjusted budget balances, the assessment of long-term sustainability and quality within the surveillance based on the stability and convergence programmes and the improvement in the quality of the data on which policy conclusions are based. Among the most relevant issues to which the EU fiscal framework is exposed there are those related to enlargement, fiscal decentralisation, measuring compliance with fiscal rules and possible trade-offs in reforming public finances. The workshop addresses key issues and challanges for EU fiscal policy-makers in the years to come.

All contributions are written on a personal basis. The views expressed represent those of the authors and not necessarily those of the organisations they work for. The preliminary papers contributed to the Workshop are not yet for quotation, unless specifically authorised by the author

Opening(18 kB)   (Servaas Deroose, European Commission)

Session 1:

Enlargement: fiscal surveillance on the road to EMU

Since the enlargement of the European Union in May 2004 from 15 to 25 member states, the process of EU budgetary surveillance has been applied to a larger and more heterogeneous union. The economic and budgetary situation differs both between new member states and between new and EU-15 member states. In the end, a sustainable fiscal position is in the interest of all countries, but yearly assessments within the process of EU budgetary surveillance could differ according to different circumstances related to catching up and real and nominal convergence towards EMU. On the basis of current fiscal and economic characteristics of the new member states, what are the relevant factors to be taken into account in the process of fiscal surveillance on the road to EMU?

Contributions by:

• Marek Dabrowski and Malgorzata Antczak (CASE, Warsaw) - ‘Fiscal Challenges Facing the New Member States’(70 kB)   - Paper(310 kB)  
• Hana Polackova Brixi (WorldBank) - ‘Contingent liabilities in new Member States(53 kB)  ’ - Paper(234 kB)  
• Maxwell Watson (European Commission) - ‘Real and Financial Convergence: Is Fiscal Policy the Right Regulator?(58 kB)  ’ -Paper(270 kB)  

Discussant:

• Filip Keereman (European Commission) - Paper(68 kB)  

Session 2:

Fiscal decentralisation: how to achieve hard budget constraints

Many EU member states are subject to a trend of fiscal decentralisation. This increases the importance of arrangements and rules for all levels of government in order to co-ordinate the overall fiscal position and ensure compliance with EU fiscal rules. In this respect, the crucial issue is to create hard budget constraints for all sectors of government, since the EU rules apply to the general government which includes central, state and local governments as well as social security. The approaches as implemented differ widely across member states and depend on factors such as the political system (unitary or federal), the degree of decentralisation and the degree of autonomy at lower levels of government. What are the crucial factors in assuring hard budget constraints for lower levels of government, to what extent do these depend on national characteristics and how do EU countries perform in this respect?

Contributions by:

• Massimo Bordignon (Catholic University of Milan and Cesifo) - ‘Fiscal Decentralisation: how to achieve a hard budget constraint(58 kB)  ’ - Paper(321 kB)  
• Jonathan Rodden (Massachusetts Institute of Technology) - ‘Achieving Fiscal Discipline in Federations: Germany and the EMU’(93 kB)   - Paper(356 kB)  
• Erik Wibbels (University of Washington) - ‘Business cycles and the political economy of pro-cyclical decentralised finance(102 kB)  ’ - Paper(267 kB)  

Discussant:

• Teresa Ter-Minassian (IMF) - Paper(27 kB)  

Session 3:

Measurement issues in budgetary surveillance

The ability to measure compliance with fiscal rules is a precondition for effective and efficient budgetary surveillance. In this respect, initiatives have been taken to improve both the quality and the analysis of the data. The assessment of long-term sustainability and the use of cyclically-adjusted fiscal data are now a standard part of the framework for budgetary surveillance, while at the same time increasing attention has been given to the degree to which fiscal consolidation relies on one-off budgetary measures. Several issues remain, however. First, is it true that the current EU fiscal framework has created a bias towards compliance in the short-run, thereby increasing the use of one-off measures and compromising long-term sustainability? Second, a consensus seems to have emerged that more emphasis should be put on debt and sustainability. However, in many countries liabilities which are not included in a commonly used definition of debt are of increasing relevance. How to take implicit and contingent liabilities into account in budgetary surveillance? Third, there also seems to be consensus that it is important to avoid pro-cyclical policies in ‘good’ times, but what does it take to implement a neutral fiscal policy? How can such action be measured and implemented?

Contributions by:

• Vincent Koen and Paul van den Noord (OECD) - ‘Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting(144 kB)  ’ - Paper(184 kB)  
• Charles Wyplosz (Graduate Institute of International Economics and CEPR) - ‘Large and Unknown Implicit Liabilities: Policy Implications for the Eurozone(64 kB)  ’ - Paper(101 kB)  
• Jacques Mélitz (University of Strathclyde, CREST and CEPR) - ‘Non-discretionary fiscal policy in the EU and the OECD’ - Paper(193 kB)  

Discussant:

• Marco Buti (European Commission) Paper(101 kB)

Session 4:

Public finances, efficiency and equity: what are the trade-offs?

The objectives of the Lisbon strategy include improving the growth potential of the EU economy and maintaining a high degree of social cohesion. In this respect, the economic literature has extensively discussed the question of whether or not there is a trade-off between efficiency and equity, without fully settling the issue. Against this background, the purpose of this section is to discuss possible trade-offs in public finances in EU countries from an empirical point of view. It will contain systematic empirical observations on the link between the size and composition of public finances and various indicators of public sector performance. Are there trade-offs between different aspects of public sector performance? If so, what are the trade-offs, what can be done to alleviate these trade-offs and what may be implications for the recommendation as made by some to prioritise the objectives of the Lisbon strategy?

Contributions by:

• Vito Tanzi (IDB) and Ludger Schuknecht (ECB) - ‘Reforming Public Expenditure in Industrialised Countries: Are There Trade-Offs?(72 kB)  ’ - Paper(312 kB)  
• Harold L. Wilensky (University of California-Berkeley): - ‘Trade-offs in Public Finances: Comparing the Wellbeing of Big Spenders and Lean Spenders’(824 kB)   - Paper(275 kB)  
• Ruud de Mooij (CPB and Erasmus University Rotterdam) and Paul Tang (CPB Netherlands Bureau for Economic Policy Analysis) - ‘Reforming the Public Sector in Europe: Reconciling Equity and Efficiency(80 kB)  ’ - Paper(133 kB)  

Discussant

• Lars Jonung (European Commission) Paper(36 kB)