The financial crisis in the European Union (EU) led the way to a new emphasis on stronger fiscal rules and institutions within a framework that defines each participant’s responsibility for maintaining sustainable public finances, without imposing adverse effects on the partner economies.
The best known fiscal rules, the EU’s Stability and Growth Pact (SGP), failed to promote adequately sustainable public finances in the period before the Great Financial Crisis. The Fiscal Compact, as contained in the 2012 Treaty on Stability, Coordination and Governance, introduced new rules on public finances to be implemented in national legislation.
However, it is not obvious if national rules jointly legislated are actually more likely to impose greater fiscal discipline than the supranational rules of the original SGP. Nonetheless, several countries have found national fiscal rules helpful in achieving greater budgetary discipline, yet allowing counter-cyclical policy actions to be taken.
An important but widely neglected aspect is the impact of fiscal rules on output and investment returns. This is crucial, in addition to the effect on fiscal imbalances, in order to better understand the economy’s ability to meet its pension liabilities and social support – either directly in the form of state pensions or indirectly via private pension funds. These issues take on added importance in an era when populations are ageing and increasingly depend on pensions, health care etc.
More generally, the institutional design, political context and operational aspects of European fiscal frameworks, both at the national and supranational level, leave a number of questions unanswered, particularly with respect to output growth, stability, the sustainability of public finances and their relation to capital and external imbalances, the issue of fiscal dominance over monetary policy, different monetary stances, risk sharing, and transfers between economies.
Other work is this area might also include reviews of how well the general principles imbedded in a supranational fiscal framework would fit the conditions of individual countries. There are considerable differences between the European economies in terms of fiscal imbalances, external imbalances, their tolerance for further integration or tendency to federalism, attitudes or susceptibility to risk, access to/depth of capital markets, diversification and so on.
There are also certain generic problems which any general fiscal institutional or rule-based framework would need to overcome: enforcement techniques, common bonds to strengthen monetary federalism, risk management of economic disasters, structural reform, and the role of a fiscal over-sight council at the European level. These are bigger issues, with impacts not restricted to the fiscal framework.
To study these and related issues, a research conference will be held in Copenhagen on June 1-2, 2017, hosted by Danmarks Nationalbank. The general theme is the political economy and institutional design of fiscal frameworks in Europe. The conference will re-evaluate fiscal frameworks in Europe in light of experience gathered since the formation of the Economic and Monetary Union (EMU). The implications for the design of fiscal policy stemming from demographic changes, and the implications for the design of pension systems, health care etc., will also be addressed.
More specifically, the following issues will be relevant to the conference:
- Enforcement of fiscal frameworks and rules
- Effectiveness and credibility of fiscal rules
- Fiscal space and long term management of public debt
- Should the desirability to accept new entrants to the EA be re-evaluated in light of recent experience?
- Fiscal policy commissions and councils
- How the bond markets have responded to the European debt crisis? Is the pricing of the risk of sovereign default consistent with economic fundamentals? Or is there evidence of overreaction in the markets?
- Refinancing techniques and arrangements, including restructuring of public debt
- GDP bonds and fiscal space
- Bailing-out governments or bailing out financial sectors?
- What are the costs of default, and are they larger or smaller than the costs of staggering on with high debt ratios/costs of borrowing or structural reform?
- Expansionary fiscal consolidation: where do we stand?
- Should rules and institutions be adopted in the EA to allow for an orderly sovereign debt default and restructuring?
- Fiscal implications of demographic change
- Debt consequences of entitlement spending
The conference will be held jointly between Danmarks Nationalbank, the Copenhagen Business School and Bruegel.
The format is a two-day event, scheduled for June 1-2, 2017.
The location of the conference is Danmarks Nationalbank in Copenhagen.
All papers accepted for the conference would be original research.
After the presentation of each paper, comments will be given by a discussant, followed by a general discussion.
Also, there will be two keynote speeches, where policy perspectives are presented by leading policymakers/advisors.
The conference brings together prominent scholars working in the areas of fiscal institutions, fiscal sustainability, banking regulatory and supervisory issues, banking crises, and so on, and applying their expertise to the context of fiscal policy in Europe.
Authors will primarily be academics, but would also involve researchers from central banks, governmental agencies, and international institutions.