39

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How could the Stability and Growth Pact be simplified?

23-04-2018

Past reforms of the Stability and Growth Pact (SGP) have improved its economic rationale, but this progress has come at the expense of simplicity, transparency and, possibly, enforceability. This study surveys and evaluates reform models that could reduce complexity without compromising the SGP’s indispensable flexibility. From a holistic perspective, the greatest potential for simplification will result from a shift of discretionary power to an independent fiscal institution. Independence is a substitute ...

Past reforms of the Stability and Growth Pact (SGP) have improved its economic rationale, but this progress has come at the expense of simplicity, transparency and, possibly, enforceability. This study surveys and evaluates reform models that could reduce complexity without compromising the SGP’s indispensable flexibility. From a holistic perspective, the greatest potential for simplification will result from a shift of discretionary power to an independent fiscal institution. Independence is a substitute for complexity. With a narrower focus on the potential streamlining of the SGP and a reduction of excess complexity, first, the preventive and corrective arms could be integrated into one procedure. Second, this integrated procedure should be centred on a net expenditure rule that is combined with a debt feedback mechanism and a memory for expenditure overruns. Third, further fiscal indicators that are currently treated as parallel targets (headline deficit rule and structural balance) could be downgraded to non-binding reference values. And fourth, the planned transposition of the Fiscal Compact into European law should follow SGP reforms in order to promote consistency between European and national fiscal rules.

Autor externo

Friedrich Heinemann

How could the Stability and Growth Pact be simplified?

23-04-2018

An assessment of the present SGP fiscal rules reveals a significant deterioration in simplicity, undermining their effectiveness. In fact, in both design and process, they have become the most complex worldwide. Three options for future reform are offered to correct this deficiency. Under the first, the structural balance and the debt convergence targets are replaced with a debt-stabilizing or -reducing primary surplus target, while retaining the expenditure benchmark. The second consolidates all ...

An assessment of the present SGP fiscal rules reveals a significant deterioration in simplicity, undermining their effectiveness. In fact, in both design and process, they have become the most complex worldwide. Three options for future reform are offered to correct this deficiency. Under the first, the structural balance and the debt convergence targets are replaced with a debt-stabilizing or -reducing primary surplus target, while retaining the expenditure benchmark. The second consolidates all current rules into a single operational debt rule by setting a limit on the discretionary budget deficit, derived from the debt reduction target. The third option consists of a market-based approach, inspired by the oldest and most successful subnational fiscal frameworks.

Autor externo

George Kopits

An economic recovery with little signs of inflation acceleration: transitory phenomenon or evidence of a structural change?

28-02-2018

This note, drawn up by Policy department A, gives an overview of in-depth analyses prepared by monetary experts for the February session of the Monetary Dialogue. The Committee on Economic and Monetary Affairs (ECON) asked the experts to prepare analyses focusing on the EU economic recovery.

This note, drawn up by Policy department A, gives an overview of in-depth analyses prepared by monetary experts for the February session of the Monetary Dialogue. The Committee on Economic and Monetary Affairs (ECON) asked the experts to prepare analyses focusing on the EU economic recovery.

An economic recovery with little sign of inflation acceleration: A transitory phenomenon or evidence of a structural change?

15-02-2018

This paper investigates the possibility that there has been a structural shift in inflation (upward) in the euro area since the recovery in 2014 or 2015. From the perspective of policy, it is important to be sure that any such shifts are significant statistically, sustained or likely to be sustained (durable) over the near future, and are evenly distributed over the member economies so that no one of them is damaged by anti-inflation measures taken to help the others. We approach the problem in two ...

This paper investigates the possibility that there has been a structural shift in inflation (upward) in the euro area since the recovery in 2014 or 2015. From the perspective of policy, it is important to be sure that any such shifts are significant statistically, sustained or likely to be sustained (durable) over the near future, and are evenly distributed over the member economies so that no one of them is damaged by anti-inflation measures taken to help the others. We approach the problem in two steps: we first examine the circumstantial and informal evidence, and then conduct formal statistical tests for structural changes in euro area inflation in 2015 or 2016. We find no evidence of a structural change under the four criteria mentioned. The even distribution of inflation criterion is the closest to being satisfied, but the other three are far from satisfied in any formal sense. There was a brief acceleration in inflation in mid-2016 towards 2%, but it flattened out in 2017 and has been constant at 1.5% ever since. Core inflation was constant at 0.9% throughout. The question is why has there been no inflation in the recovery and how long is that likely to last? In a third step, we explain how low growth in real wages and self-reinforcing low productivity growth produces slow output growth and low inflation. This model fits the data pretty well, down to the lack of labour and total factor productivity and to substituting cheaper labour for excess capital stock. It implies a fall in investment spending (also seen in the data) which in turn extends the period for which low productivity-low inflation outcomes apply.

Autor externo

Andrew HUGHES HALLETT

Why does the recovery show so little inflation?

15-02-2018

We investigate the determinants of inflation in the euro area since 2000 and show that the most important determinants are inflation expectations and wage growth. Both indicators have contributed negatively to inflation since 2014 but inflation expectations less so since 2015 whereas the contribution of wage growth has remained negative. We suggest that structural reforms may have put a drag on the ability of the ECB to reach its inflation target rapidly.

We investigate the determinants of inflation in the euro area since 2000 and show that the most important determinants are inflation expectations and wage growth. Both indicators have contributed negatively to inflation since 2014 but inflation expectations less so since 2015 whereas the contribution of wage growth has remained negative. We suggest that structural reforms may have put a drag on the ability of the ECB to reach its inflation target rapidly.

Autor externo

Christophe BLOT, Jérôme CREEL, Paul HUBERT, OFCE (Sciences Po)

Economic recovery and inflation

15-02-2018

In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically ...

In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically decreasing, the financial sector is more eager to lend, and its clients—to borrow. Rapidly growing asset prices signal the possibility of similar developments in other segments of the economy. In this new macroeconomic environment, central banks should cease unconventional monetary policies and prepare themselves to head off potential inflationary pressures.

Autor externo

Marek Dabrowski, CASE

Persistent low inflation in the euro area: Mismeasurement rather than a cause for concern?

15-02-2018

The huge literature on the causes of the persistent weakness in inflation in the euro area has not identified one single key factor. Moreover, inflation has also been lower than expected in many advanced countries. Low inflation expectations seem to have played an important role in reducing wage demand, both in the US and the euro area; but a residual output gap also contributes. The concerns about low inflation seem overblown. The HICP (Harmonized Index of Consumer Prices) used to measure inflation ...

The huge literature on the causes of the persistent weakness in inflation in the euro area has not identified one single key factor. Moreover, inflation has also been lower than expected in many advanced countries. Low inflation expectations seem to have played an important role in reducing wage demand, both in the US and the euro area; but a residual output gap also contributes. The concerns about low inflation seem overblown. The HICP (Harmonized Index of Consumer Prices) used to measure inflation in the euro area differs from the indices used in most advanced countries in that it does not account for the cost of owner occupied housing. This omission has a considerable impact on measured inflation and can explain most of the difference between inflation in the US and in the euro area. If the HICP were to incorporate the available estimates of inflation in owner occupied housing, measured inflation would be close to 2 %.

Autor externo

Daniel GROS, CEPS

An economic recovery with little signs of inflation acceleration: Transitory phenomenon or evidence of a structural change?

15-02-2018

Inflation has been persistently below the inflation target of the ECB despite the ongoing economic recovery in the euro area. In this paper, we analyse whether the relationship between inflation and economic activity in the euro area has changed based on a review of the literature and discuss implications for monetary policy.

Inflation has been persistently below the inflation target of the ECB despite the ongoing economic recovery in the euro area. In this paper, we analyse whether the relationship between inflation and economic activity in the euro area has changed based on a review of the literature and discuss implications for monetary policy.

Autor externo

Salomon FIEDLER, Nils JANNSEN, Ulrich STOLZENBURG, Kiel Institute for the World Economy

Informe Anual 2016 del Banco Central Europeo

31-01-2018

Durante el Pleno de febrero I, el Parlamento debatirá el informe anual para 2016 del Banco Central Europeo (BCE) y tiene que debatir un informe de propia iniciativa sobre las políticas del BCE. Además de aportar información sobre la economía de la zona del euro y sobre las políticas del BCE, en este informe el BCE también comenta la Resolución del Parlamento Europeo de 2016 sobre el informe anual 2015 del BCE.

Durante el Pleno de febrero I, el Parlamento debatirá el informe anual para 2016 del Banco Central Europeo (BCE) y tiene que debatir un informe de propia iniciativa sobre las políticas del BCE. Además de aportar información sobre la economía de la zona del euro y sobre las políticas del BCE, en este informe el BCE también comenta la Resolución del Parlamento Europeo de 2016 sobre el informe anual 2015 del BCE.

The European Union: A year of hope [What Think Tanks are thinking]

15-12-2017

The self-confidence of the European Union improved markedly during the past year after the 'annus horribilis' of 2016 when the EU faced a 'poly-crisis' of a shaky euro-area economy, the Brexit vote, the election of Donald Trump as US President, migration pressures, growing Russian assertiveness and apparent foreign-policy drift. The euro-area economy has since entered onto a clear recovery path, popular support for the EU has increased in many countries, Eurosceptic political parties have made smaller ...

The self-confidence of the European Union improved markedly during the past year after the 'annus horribilis' of 2016 when the EU faced a 'poly-crisis' of a shaky euro-area economy, the Brexit vote, the election of Donald Trump as US President, migration pressures, growing Russian assertiveness and apparent foreign-policy drift. The euro-area economy has since entered onto a clear recovery path, popular support for the EU has increased in many countries, Eurosceptic political parties have made smaller than expected gains in several elections, Brexit negotiations have made progress and, according to some analysts and politicians, EU foreign and security policy has developed a global strategy backed by moves towards an integrated defence. 'The wind is back in the European sails,’ said Jean-Claude Juncker, President of the European Commission, in September. 2017, the year when the EU marked the 60th anniversary of the European Union's founding Treaty of Rome, generated much creative thinking on how to re-launch or strengthen both the EU-27 and the euro area. This note offers links to selected recent commentaries, studies and reports from major international think tanks on the state of the EU in 2017 and its outlook in several important areas.

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