1. THE EURO AREA FISCAL POLICY RESPONSE TO THE ECONOMIC CRISIS: THE FIRST YEAR Ad van Riet Head of Fiscal Policies Division European Central Bank Bucharest, 18-19 November 2009 This presentation has been prepared with the excellent support of Cristina Checherita and partly draws on her work

2. Outline 1.Introduction 2.The effectiveness of a fiscal impulse for the economy Automatic stabilisation Discretionary fiscal policies 3.Assessing the European Economic Recovery Plan 4.The fiscal outlook for the euro area 5.Lessons for fiscal discipline

3. 3 Decomposition of the fiscal impulse

4. 44 Fiscal impulse 2008-10 in euro area and US Source: ECB calculations based on IMF October 2009 World Economic Outlook Automatic stabilisers typically play a more important role in European economies compared to the U.S. due to larger public sectors Change in budget balance due to automatic stabilisers and fiscal stance (% of GDP)

5. 55 European Economic Recovery Plan Aim: limit the impact of the economic crisis via coordinated fiscal measures at the EU and national level Budgetary stimulus measures of 200 bn (~1.5% of EU GDP), o/w 170 bn from Member States and 30 bn from EU and EIB budgets Stimulus to be differentiated across Member States to reflect their own needs and room for budgetary manoeuvre Governments to ensure a timely, targeted and temporary fiscal stimulus (TTT-criteria for success) Fiscal stimulus to be consistent with the Stability and Growth Pact and Lisbon Strategy

6. 6 Four categories of fiscal stimulus measures Source: European Commission (2009 Annual Report on the euro area) and ECB staff calculations.

7. 7 Size of fiscal stimulus packages 2009, 2010 % GDP BEL DEU IRL GRC/ ITA ESP FRA LUX MLT NLD AUT PRT SVK/ CYP SVN FIN EA16 0 0.5 1.0 1.5 2 2.5 2009 00.51.01.52.0 Fiscal stimulus 2010 Timely? Temporary?

8. 8 Euro area budget balance over 1998-2010 Accommodating the impact of automatic stabilisers (yellow) and organising fiscal stimulus (red) during the crisis has come at a very high cost for public finances. Also high structural deficit (blue) must be corrected. Source: EC Forecast Autumn 2009

9. 9 Euro area public finances under strain Budget balance of euro area countries in 2007 and 2010 (% GDP) -3%

10. 10 Lessons for fiscal discipline Need to comply with medium-term budgetary objectives Coordinated fiscal expansion to remain exception rather than become the new rule, especially if result is excessive deficits Any coordinated fiscal stimulus must be combined with credible exit strategies to anchor expectations of fiscal sustainability Need to preserve confidence in the recovery phase via: a timely withdrawal of the fiscal stimulus measures adopting credible consolidation plans within the framework of the Stability and Growth Pact Fiscal consolidation should meet the SSS-criteria for success: Substantial Structural Spending-based

11. 11 THANK YOU FOR YOUR ATTENTION !