Academic journal article National Institute Economic Review

Economic Policy and Surveillance in Europe: Introduction

Academic journal article National Institute Economic Review

Economic Policy and Surveillance in Europe: Introduction

Article excerpt

Economic governance within the EU continues to evolve; a process which has accelerated since the onset of the Global Financial Crisis. In particular, additional rules and processes have been created to support the completion of Economic and Monetary Union (EMU). It is within the Euro Area that we see the greatest manifestation of the new rules for economic governance at a supranational level. The ambition for the completion of EMU is exemplified in the Five Presidents' Plan which provided a map for the completion of 'genuine' Economic, Financial, Fiscal and Political Union (Junker et al., 2015). Reforms across these broad fronts have evolved at varying speeds, with some areas significantly more advanced than others. The completion of 'genuine' EMU by 2025 is a far from certain prospect.

The fiscal arena is one of the areas that has seen a significant increase in rules over the past half decade. This increase is not surprising given the increases in public debt we have observed in the past decade. Preventative and corrective procedures are in place to constrain the policymakers of Member States. With this is mind, it is worth analysing the rules we have in place, their effectiveness, and where possible provide advice on improvements to the economic governance architecture of the EU. The FIRSTRUN project has been commissioned to contribute to this debate and is a European Union funded multinational research project that aims to investigate the fiscal policy coordination in the EU, to assess the coherence of the recent reforms within the economic governance framework, and to identify reforms that could fill possible gaps. The project commenced in March 2016 and will continue to February 2018. There is much research content available on the project's dedicated website, (1) and the first three papers in this edition of the Review are outputs from FIRSTRUN.

Iain Begg (London School of Economics) examines the political economy of compliance with the rules of the EU. He highlights how the rules adopted by EU Member States have become ever more "extensive and intrusive". Indeed, one response to the Euro Area crisis has been a proliferation of rules. He raises important questions about whether the decisions that appear to be based on political expediency risk undermining the "integrity and effectiveness of the rules". He reminds us that half the Euro Area has breached the 60 per cent of GDP debt limit for more than 50 per cent of the time since the creation of the Euro Area, Greece and Portugal missed the 3 per cent of GDP deficit target in most years prior to the Global Financial Crisis, and then there is the most notorious case of the rejection of the Stability and Growth Pact (SGP) sanctions for breaches by France and Germany in 2002/3. Begg highlights that, since 2011, Member States have been required to introduce budgetary frameworks in response to credibility concerns about the enforceability of EU rules. Indeed there has been a steady increase in the number of national level fiscal rules and a significant increase in the presence of fiscal councils. Begg's evidence suggests these have not necessarily been successful in ensuring compliance with EU rules, such as the SGP. He concludes with the important observation that "the EU faces the dilemma that reliance on fiscal and other rules is not enough to assure sustainable macroeconomic stability in a context in which politicians are not only adept at circumventing them, but garner popular support for doing so".

Tero Kuusi (Research Institute of the Finnish Economy, Helsinki) analyses the methods used by the Commission to estimate the structural budget positions of Member States. The Commission's estimates of the structural budget play an important role in the Stability and Growth Pact, where the estimates of the structural budget guide the path for the elimination of an excessive deficit. Such estimates are a prominent output of the European Commission, appearing in the forecasts of the Commission published three times a year. …

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