Tying hands is not commitment: can fiscal rules and institutions really enhance fiscal discipline?

Visiting Bruegel Scholar, Xavier Debrun, discusses the role of fiscal institutions, including budget rules and non-partisan agencies, in enhancing fiscal discipline.

Implementing the stability and growth pact: enforcement and procedural flexibility

The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays. JEL Classification: E62, H6deficits, fiscal rules, procedural flexibility, Stability and Growth Pact, structural reforms

Economic reforms in the euro area: is there a common agenda?

Visiting scholar Xavier Debrun, and Bruegel director Jean Pisani-Ferry contribute to the emerging discussion on reform strategies in the euro area. An earlier version of this note was presented to the Eurogroup Working Group of the Economic Policy Committee of the EU.

Is Fiscal Policy Coordination in EMU Desirable?

It is widely argued that Europe's unified monetary policy calls for the international coordination at the fiscal level. We survey the issues involved with such coordination of fiscal policy as a demand management tool and we use a simple model to investigate the circumstances under which coordination may be desirable. It turns out that coordination is beneficial when the correlation of the shocks hitting the various economies is low. However, given the potentially adverse reaction by the ECB (as a result of free-riding and/or a conflict on the orientation of the policy mix), fiscal coordination is likely to be counterproductive when demand or supply shocks are highly symmetric across countries and the governments are unable to acquire a strategic leadership position vis-à-vis the ECB.EMU, fiscal coordination, shocks, demand management

Government size and output volatility: should we forsake automatic stabilisation?

In this working paper, Xavier Debrun, Jean Pisani-Ferry and André Sapir explore the relationships between government size and output volatility. Whilst government size contributes to macroeconomic stabilisation, the slow down in output volatility of the 1980s and 90s was due more to a combination of monetary policy improvements and financial developments. That this decline was especially pronounced in small-government countries showed a reduction in the variance of primary income was more important than government transfers and that other channels of stabilisation were available for small-government countries. For most countries in the euro area, the impact of a marginal change in the size of government is bound to be small.

Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach

This paper proposes a probabilistic approach to public debt sustainability analy-sis (DSA) using "fan charts." These depict the magnitude of risks-upside and downside-surrounding public debt projections as a result of uncertain economic conditions and policies. We propose a simulation algorithm for the path of public debt under realistic shock configurations, combining pure economic disturbances (to growth, interest rates, and exchange rates), the endogenous policy response to these, and the possible shocks arising from fiscal policy itself. The paper empha-sizes the role of fiscal behavior, as well as the structure of disturbances facing the economy and due to fiscal policy, in shaping the risk profile of public debt. Fan charts for debt are derived from the "marriage" between the pattern of shocks on the one hand and the endogenous response of fiscal policy on the other. Applications to Argentina, Brazil, Mexico, South Africa, and Turkey are used to illustrate the approach and its limitations. Copyright 2006, International Monetary Fund

Independent Fiscal Institutions in the European Union: Is Coordination Required?

Increased reliance on national frameworks to improve compliance with EU standards of fiscal soundness calls for coordination among EU member states. We focus on the rationale and forms of coordination among national independent fiscal institutions (IFIs). IFIs aim at strengthening governments’ incentives to adhere to national fiscal rules mainly through monitoring activities that provide non-partisan information on the conduct of fiscal policy to all stakeholders in the budget process. Such activities increase the costs of inadequate policies in terms of reputation loss, financing conditions, and electoral sanctions. The case for coordination is two-pronged. First, national IFIs are not all born equal, with questions remaining as to how some of them can effectively play their role. Accepting too many weak IFIs would undermine the aim of recent reforms to strengthen rules-based fiscal policy and bolster the stability of the euro area. Second, as national IFIs and the European Commission (EC) both monitor fiscal policies, disagreements could lead to cacophony and weaken IFIs’ impact on the public debate about fiscal policy. Thus, coordination should aim at (i) ensuring that all national IFIs converge to international best practice in their operations and (ii) mitigating the risk of cacophony in fiscal surveillance. To preserve national IFIs independence, coordination—both between the EC and IFIs and among the latter—should be limited to information exchanges and peer-pressure-through-emulation. A beefed-up European Fiscal Board would have a key role to play in facilitating such coordination

Making Fiscal Space Happen! Managing Fiscal Policy in a World of Scaled-Up Aid

aid, fiscal policy, low income countries, macroeconomic policy, public financial management

Making the most of the European Fiscal Board

Nach den zahlreichen fiskalpolitischen Reformen in der Eurozone seit 2011 wurde im Jahr 2016 eine weitere wichtige Neuerung eingeführt: die Gründung des Europäischen Finanzausschusses (EFB) sowie die Auswahl und Ernennung seiner fünf Mitglieder. Der Fiskalausschuss war einer der Vorschläge, die im Bericht der fünf Präsidenten im Juni 2015 (Juncker et al., 2015) mit dem Ziel der Schaffung einer "Fiskalunion" vorgebracht wurden. Es ist außerdem das einzige Element des Berichts, das innerhalb von kürzester Zeit umgesetzt wurde. Der Vorschlag über die Einrichtung einer solchen Institution wurde im Oktober 2015 von der Europäischen Kommission eingereicht. Bereits im Oktober 2016 nahm der Fiskalausschuss kurze Zeit nach Ernennung seiner Mitglieder seine Arbeit auf