EU fiscal consolidation after the financial crisis. Lessons from past experiences

Summary for non-specialistsThe global financial crisis has led to a sharp deterioration of EU countries' public finances. Views are split regarding the most appropriate consolidation strategy to follow, in particular considering: the timing of fiscal consolidation in relation to the path of economic recovery reflecting (a) the trade-off between consolidation and stabilisation; (b) fiscal consolidation in the context of a distressed banking system where the credit channel is hampered and without which economic recovery can hardly take place, (c) the absence of exchange rate adjustment in the euro area which could make it more difficult for countries with competitiveness problems to achieve successful fiscal consolidation. The existing literature on fiscal consolidations provides only partial evidence on these issues.In this paper our objective is to focus on the above points of discussion drawing on EU (and non-EU OECD) experiences during the period 1970-2008. We estimate econometrically the determinants of successful fiscal consolidations and show that: (i) in presence of a systemic financial crisis, the repair of the banking sector is a pre-condition for a fiscal consolidation to succeed in reducing debt levels (ii) even after the banking sector is repaired, fiscal consolidations are usually less successful than in absence of financial crises, although more vigorous fiscal consolidations (i.e. cold shower) tend to yield higher results (iii) current debt dynamics in the EU are very unfavourable and in some cases, coupled with rising debt servicing costs and much deteriorated growth outlook warranting differentiated consolidation strategies across EU countries (iv) We do not find conclusive evidence in support of exchange rates (including real exchange rate) depreciation/devaluation as enhancing the success of fiscal consolidation as their effect appear to be low and insignificant.Fiscal consolidation financial crisis debt barrios langedijk pench

Some unpleasant arithmetics of regional unemployment in the EU. Are there any lessons for EMU?

Several studies have documented the weak response of regional wage differentials and labour mobility following region-specific (“idiosyncraticâ€) shocks in the average of the EU countries. This has been often taken as evidence of the rigidity of labour markets in European countries, as opposed to the flexibility of the USA. However, as such shocks by definition average to zero, one cannot make an explicit link between the (lack of) adjustment at regional level and aggregate unemployment. Moreover, the emphasis on the reaction to short-run idiosyncratic shocks is unlikely to explain the permanent differentials across regions, which characterise the regional distribution of unemployment in many EU countries. This paper tries to provide a better understanding of the regional distribution of unemployment and why region-specific shocks can matter for aggregate unemployment. It does so by explicitly considering the possibility of asymmetric reactions, so that unemployment rises more in poorer areas suffering an adverse shock than it declines in richer regions experiencing a favourable shock. The reason behind such asymmetries is the presence of a wage floor in the poorer regions resulting from policy centralisation, as for instance in the case of a national unemployment compensation system, which provides benefits that are uniform across regions. If such a mechanism is at work, aggregate unemployment tends to be “inflated†by region-specific shocks that are inequality- increasing. After presenting an illustrative model of the mechanism, the paper proposes a simple measure of the resulting “excess unemploymentâ€, based on the difference between the average (national) unemployment rate and the unemployment rate of the median region. It also examines the relationship between regional asymmetries in unemployment and the dispersion of productivity across regions, taken as proxy of the inequality-increasing shocks. The evidence, while not entirely conclusive, justifies two tentative policy conclusions, which are particularly relevant in the context of EMU: a) to avoid centralisation of labour market institutions at the EU level that may end up inflating aggregate unemployment; b) to effectively deploy regional policies to combat inequality- increasing shocks.regional policy, unemployment, disparities

Some Unpleasant Arithmetics of Regional Unemployment in the EU. Are there any lessons for EMU? European Commission Forward Studies Unit, 1999

Several studies have documented the weak response of regional wage differentials and labour mobility following region-specific ("idiosyncratic ") shocks in the average of the EU countries. This has been often taken as evidence of the rigidity of labour markets in European countries, as opposed to the flexibility of the USA. However, as such shocks by definition average to zero, one cannot make an explicit link between the (lack of) adjustment at regional level and aggregate unemployment. Moreover, the emphasis on the reaction to short-run idiosyncratic shocks is unlikely to explain the permanent differentials across regions, which characterise the regional distribution of unemployment in many EU countries. This paper tries to provide a better understanding of the regional distribution of unemployment and why region-specific shocks can matter for aggregate unemployment. It does so by explicitly considering the possibility of asymmetric reactions, so that unemployment rises more in poorer areas suffering an adverse shock than it declines in richer regions experiencing a favourable shock. The reason behind such asymmetries is the presence of a wage floor in the poorer regions resulting from policy centralisation, as for instance in the case of a national unemployment compensation system, which provides benefits that are uniform across regions. If such a mechanism is at work, aggregate unemployment tends to be "inflated" by region-specific shocks that are inequality-increasing. After presenting an illustrative model of the mechanism, the paper proposes a simple measure of the resulting "excess unemployment ", based on the difference between the average (national) unemployment rate and the unemployment rate of the median region. It also examines the relationship between regional asymmetries in unemployment and the dispersion of productivity across regions, taken as proxy of the inequality-increasing shocks. The evidence, while not entirely conclusive, justifies two tentative policy conclusions, which are particularly relevant in the context of EMU: a) to avoid centralisation of labour market institutions at the EU level that may end up inflating aggregate unemployment; b) to effectively deploy regional policies to combat inequality- increasing shocks

The Evolution of Economic Governance in EMU

This paper examines the benefits of co-ordination in EMU in a stylised manner and how these benefits have shaped the co-ordination framework in EMU. It then discusses in detail the co-ordination experience in four areas that are particularly important for the functioning of EMU: (i) fiscal policy co-ordination under the Stability and Growth Pact (SGP); (ii) the co-ordination of structural policies under the Lisbon Strategy for Growth and Jobs; (iii) the representation and co-ordination of euro-area positions in international financial fora; and (iv) the co-ordination of macroeconomic statistics. The thrust of the findings is that EMU's system of economic governance has, overall, proven fit for purpose. The current policy assignment to the institutions and instruments that govern the conduct of economic policy in EMU is sound, even though further progress is necessary in several areas, particularly as regards external representation.Governance, EMU, euro area, co-ordination, van den Noord, D�hring, Langedijk, Nogueira-Martins,Pench, Temprano-Arroyo, Thiel

Quelles politiques pour soutenir la recherche et le développement ?

Jacquemin Alexis, Pench Lucio. Quelles politiques pour soutenir la recherche et le développement ?. In: Revue d'économie industrielle, vol. 94, 1er trimestre 2001. What policies in support for r&d ? sous la direction de Alexis Jacquemin et Lucio Pench. pp. 13-20