1. Presented by Daniel Gros Public Hearing on Institutional Aspects of the New Rules on Economic Governance and the Role of the EUROGROUP European Parliament, May 5 Centre for European Policy Studies www.ceps.eu What is the rationale for EMU Governance and Economic Coordination

2. The EMU governance system Economic policy coordination and spillovers Conclusions 2 Centre for European Policy Studies www.ceps.eu Outline

3. Rule-based system with complex procedures. A complex set of rules: – Six-pack European Semester – Two-pack – (The forgotten) Treaty on Stability, Coordination and Governance For the EA MS but also the other EU countries Different actors, competences and degrees of accountability Overall aim of recent changes: strengthen economic coordination and surveillance (EC document 2010) Centre for European Policy Studies www.ceps.eu EMU Governance System (I) 3

4. “ The crisis exposed fundamental problems and unsustainable trends in many European countries. It also made clear just how interdependent the EU's economies are. Greater economic policy coordination across the EU will help us to address these problems and boost growth and job creation in future”. European Commission http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/priorities/economic- governance/index_en.htm => No crisis no interdependence? Centre for European Policy Studies www.ceps.eu EMU Governance System (II) 4

5. Centre for European Policy Studies www.ceps.eu EU constraints on national economic policies High Low Risk & size of spillover effects HighLow EDP and MIP for excessive deficits and imbalances Coordination and surveillance of fiscal and macroeconomic policies Enhanced surveillance of MS under financial stress Adjustment programmes under ESM A representation of EMU economic governance

6. Major threats to systemic stability arise from fiscal imbalances (EDP) and external and financial ones (MIP) Rules to limit risks, and economic policy coordination to face spillovers Our focus: spillovers. Centre for European Policy Studies www.ceps.eu Two fundamental assumptions of the governance system 6

7. In terms of crisis, the external position of a country might be as important as the fiscal position. Justification for coordination is the existence of spillover effects. Do we know they work? Centre for European Policy Studies www.ceps.eu Two fundamental criticisms 7

8. The economic rationale for policy coordination (and ‘corrective action’) is that idiosyncratic shocks in one country impact demand/employment in other countries and the entire union. What do we know about spillovers? – They differ according to the state of the economy – Depend of fiscal/external position of the country – Depend on the stability of the financial system Centre for European Policy Studies www.ceps.eu Spillover effects in a Monetary Union (I) 8

9. Different shocks need to be considered: Fiscal policy (deficit spending) Growth policy (increase in productivity) (not policy): level of public debt Centre for European Policy Studies www.ceps.eu Spillover effects in a Monetary Union (II) 9

10. Relevant Variable State of the Economy Sovereign Debt (high debt) Fiscal policy (deficit up) Growth: Productivit y enhancing Normal times no?? Zero interest rate (policy rate) no+? Crisis times: High risk premia - - -- ++ Spillover effects in a Monetary Union

11. Assumption: – No confidence problems – Debt level irrelevant within certain limits – No ZLB problem Higher deficit has two effects: demand increases and interest rates increases => net spillover effect uncertain Effect of higher productivity on other countries also uncertain (Investment, competitiveness and L-mkt channels) Centre for European Policy Studies www.ceps.eu Regime: Normal times 11 Relevant Variable State of the Economy Sovereig n Debt Budget balanc e Growth Zero interest rate no+-? Crisis times: High risk premia - - -- ++

12. Debt level irrelevant Fiscal deficit: – Positive spillover: demand channel dominates Effect of higher productivity on rest of union: competitiveness channels might dominate with sluggish wages  Negative spillover effect from structural reforms? Centre for European Policy Studies www.ceps.eu Regime: Zero interest rate 12 Relevant Variable State of the Economy Sovereign Debt Budget balanc e Growth Normal times no?? Crisis times: High risk premia - - -- ++

13. High risk premia Debt matters Deficit: Confidence effect potentially important => spillover strongly negative BUT opposite policy may also have short run negative effect on debt ratio: self-defeating austerity? Productivity positive spillover because of confidence Overall the size of spillovers depends of the resilience of financial system Centre for European Policy Studies www.ceps.eu Regim: Crisis times 13 Relevant Variable State of the Economy Sovereign Debt Budget balance Growth Normal times no?? Zero interest rate no+?

14. Complex system of rules Rules remain the fundamental pillar of the system – Questioning them = questioning EMU Economic rationale for coordination may lack robustness Clarify what coordination is The perception that Brussels knows what is best is hard to accept if the approach imposed does not deliver (output legitimacy) Centre for European Policy Studies www.ceps.eu Conclusions 14

15. Thank you! 15 Centre for European Policy Studies www.ceps.eu