scholarly journals Is debt restructuring needed to make the Stability and Growth Pact (more) credible?

2011 ◽  
Vol 59 (2) ◽  
pp. 155-164
Author(s):  
Jens Körner
Keyword(s):  
Interest Rates ◽  
Monetary Union ◽  
Public Debt ◽  
European Monetary Union ◽  
Stability And Growth Pact ◽  
European Monetary ◽  
Debt Restructuring ◽  
Growth Pact ◽  
Starting Point ◽  
The Stability

The emergence of the so-called PIIGS crisis which in 2009 became acute due to strongly diverging risk premiums, marked the beginning of a new phase for the European Monetary Union. Whilst the run-up to EMU had been characterized by an encouraging convergence of macroeconomic fundamentals of its member countries, it is now facing a serious threat in particular due to excessive levels of public debt. In 1997, the Stability and Growth Pact introduced a mechanism designed to prevent excessive public debt of the type currently observed; the fact of the matter, however, seems to be that levels of public debt has continuously grown from one economic cycle to the next. But the SGP apparently not only failed to fulfil its aim to keep the deficit and the debt level within its limits but also suffered from a severe loss of credibility; unless some profound action is taken it may further diminish, severely hampering the loose structure of the European Monetary Union. In order to regain some credibility, mitigate financial market’s concerns and, hence, lower borrowing cost, a consolidation path is needed to returns to acceptable levels of debt in the foreseeable future. This process has already started and measures have been taken by several eurozone countries to speed up fiscal consolidation. The aim of the paper is to analyze whether or not the group of the PIIGS countries are likely to return to debt levels in accordance with the SGP criteria or if it might be necessary to undergo a process of debt restructuring or default. By analysing different scenarios where nominal interest rates on debt (r) and nominal growth rates (n) as well as gaps thereof (r-n), herein called the automatic debt dynamics, are varied, this paper comes to the conclusion, that debt restructuring or default is a likely outcome for some of the PIIGS; arithmetics is in particular playing against Greece. As disillusioning and disappointing this outcome might be for some observers, it could be the starting point for a more credible set of rules for the SGP, which the author deems to remain a crucial component in any institutional set-up within the eurozone.

Institutionelle Alternativen in der Europäischen Union: Das Beispiel des Stabilitäts- und Wachstumspaktes

2006 ◽  
Vol 55 (2) ◽  
Author(s):  
Renate Ohr ◽  
André Schmidt
Keyword(s):  
Monetary Union ◽  
European Monetary Union ◽  
Allocative Efficiency ◽  
Stability And Growth Pact ◽  
European Monetary ◽  
Fiscal Deficits ◽  
Member States ◽  
Growth Pact ◽  
The Stability

AbstractThe Stability and Growth Pact is one of the constituent pillars of the European Monetary Union. Though, meanwhile it is obvious that it will not be able to limit fiscal deficits of the member states. For this reason in this paper Coase′s thinking in institutional alternatives is applied to find a better way to increase the incentives for more fiscal stability. We present and discuss tradable deficit permits comprising market-orientated incentives for fiscal stability. It is shown that tradable deficit permits are superior from a politico-economical view as well as with regard to allocative efficiency.

scholarly journals Deficit Policy within the Framework of the Stability and Growth Pact: An Empirical Analysis

2017 ◽  
Vol 4 (2) ◽  
pp. 76 ◽  
Author(s):  
Nicolas Afflatet
Keyword(s):  
Empirical Analysis ◽  
Monetary Union ◽  
European Monetary Union ◽  
Union Member ◽  
Debt Crisis ◽  
Stability And Growth Pact ◽  
European Monetary ◽  
Growth Pact ◽  
The Stability ◽  
The Empirical Analysis

It has become common to criticize Germany and France for having broken the Stability and Growth Pact in 2003, supposedly giving way for higher deficits thereafter. However, this question has not yet been answered by the economic literature. It is closely related to the issue whether the Stability and Growth Pact had any disciplining effect on European Monetary Union member countries or not. This article examines the question whether joining the European Monetary Union or the breach of the Stability and Growth Pact in 2003 had an impact on deficits of member states. The empirical analysis shows no evidence for higher deficits after having joined the Eurozone or after having breached the Pact in 2003. These results are robust to different testing methods and when using different data samples. They can be explained with the fact that the Pact was undermined from its beginning and only had a limited disciplining effect henceforth. Otherwise the breakout of the ongoing debt crisis would hardly have been possible.

scholarly journals Aнализа степена испуњености Мастрихтских критеријума конвергенције у Босни и Херцеговини // The analysis of the Bosnia and Herzegovina’s level of compliance with the Maastricht convergence criteria

2013 ◽  
Vol 11 (18) ◽  
pp. 337
Author(s):  
Бранка Топић-Павковић
Keyword(s):  
Interest Rates ◽  
Monetary Union ◽  
Public Debt ◽  
European Monetary Union ◽  
Monetary Integration ◽  
Convergence Criteria ◽  
European Monetary ◽  
Gradual Process ◽  
Productivity And Competitiveness ◽  
The Eu

Резиме: Идеја о формирању Европске монетарне уније (ЕМУ) произашла је из чињенице да монетарно интегрисање има значајне економске предности код снижавања трансакционих трошкова, веће транспарентности цијена и монетарну стабилност. Теорија оптималног валутног подручјa истиче позитивну везу високог степена конвергенције и постизања користи од интегрисања и вођења заједничке политике за земље чланице монетарне уније Мастрихтски критеријуми конвергенције подразумијевају да земља која улази у ЕМУ има релативно ниску инфлацију, стабилну валуту, низак ниво буџетског дефицита, одржив јавни дуг, као и релативно ниске каматне стопе. Прије стицања позиције кандидата за приступ у ЕМУ, Босна и Херцеговина мора постати чланом ЕУ, и испунити критеријуме за чланство који се односе на политичке, економске, административне и правосудне институције. Будући да су Мастрихтски критеријуми конвергенције прецизније дефинисани од осталих критеријума, у економској литератури често се користе као показатељ спремности земаља кандидата за приступ Е(М)У. Поред сагледавања теоријских и емпиријских сазнања о условима монетарног интегрисања, циљ овог рада је да, на основу компаративне анализе остварених економских перформанси БиХ и земаља региона, оцијенимо остварену конвергенцију и степен приближавања БиХ критеријумима конвергенције из Мастрихта. Резултати истраживања сугеришу да је за БиХ, након уласка у ЕУ, рационално рјешење постепен процес монетарне интеграције, који уз стабилну монетарну политику подразумијева ефикасно управљање јавним финансијама и опрезно управљање јавним дугом. Дугорочни циљ БиХ огледа се у достизању реалне конвергенције кроз повећање продуктивности и конкурентности.Summary: The idea of forming the European Monetary Union (EMU) derives from the fact that monetary integration has considerable economic advantages in lower transaction costs, greater price transparency and monetary stability. Аccording to the optimum currency area (OCA) theory, it is very important for member states to achieve high level of convergence in order to exploit advantages of integrating and conducting a common policy. Maastricht convergence criteria imply that a country that enters the European Monetary Union (EMU) has a relatively low inflation, a stable currency, low budget deficits, relatively low interest rates and sustainable public debt. Before gaining the position of candidates for EMU, Bosnia and Herzegovina has to become a member of the EU and to achieve the criteria for membership related to the development of political, economic, administrative and judicial institutions. Since the Maastricht convergence criteria are more precise than other criteria, in the economic literature are often used as an indicators of the readiness of the candidate countries to access the E(M)U. In addition to consideration of theoretical and empirical knowledge about the monetary integration, the main goal of this paper is to, using the comparative analysis of actual economic performance of BiH and the region, provides us with knowledge and assessment of BiH stage of compliance with the Maastricht convergence criteria. The results show that a rational solution for BiH, after joining the EU, is based on gradual process of monetary integration, with stable monetary policy, effective management of public finances and careful management of public debt. The long-term goal of BiH lies in achieving real convergence through increased productivity and competitiveness.

scholarly journals The SGP – Faulty by Design or Made Faulty by Politicians? An Assessment Based on a Simulation Model

2014 ◽  
Vol 14 (3) ◽  
pp. 249-265
Author(s):  
Šárka Horáková ◽  
Robert Jahoda
Keyword(s):  
Public Debt ◽  
European Monetary Union ◽  
Budget Deficit ◽  
Real Data ◽  
Stability And Growth Pact ◽  
European Monetary ◽  
Fiscal Discipline ◽  
Growth Pact ◽  
The Impact ◽  
Initial Results

Abstract By joining the European Monetary Union (the “EMU”), member countries lost the ability to use monetary policy as a tool for macroeconomic regulation. The attention was then focused on regulation of fiscal policy and Stability and Growth Pact (the “SGP”) was the instrument agreed upon. The states of the EMU have agreed to meet the 3% of GDP requirement for the maximum annual public budget deficit. Based on evolution of public debt in member countries, we can say that the SGP has failed as a tool for fiscal discipline. In this paper, we answer the question of whether the failure was due to the incorrect concept of the SGP or whether the development of the debt was affected more by arbitrary disrespect of the agreed rules. The two reasons mentioned above are interdependent. To separate them, we construct a dynamic model of EU countries’ public debt. By using real data, we simulate the potential values of public debt in a situation where the SGP rules have been respected in recent years. Comparing the results for the potential debt given by simulation of the model with the current real values, we are able to quantify the impact of non-compliance for each country. The initial results indicate that there are both EU states where non-compliance led to a negligible increase in public debt - up to 7% of GDP - and other states where this factor caused the growth of public debt by more than 30% of GDP.

scholarly journals Risking the Stability of EMU: the Asymmetric Application of the Stability and Growth Pact

2006 ◽  
Vol 2 (1) ◽  
Author(s):  
Bartholomew Paudyn
Keyword(s):  
Interest Rates ◽  
Price Stability ◽  
Risk Governance ◽  
The Political ◽  
Stability And Growth Pact ◽  
Risk And Uncertainty ◽  
The Core ◽  
Growth Pact ◽  
Ultimate Objective ◽  
The Stability

Fiscal profligacy poses a high risk to the credibility of Europe common monetary policy and its ultimate objective of price stability. Unfortunately, the aim of preventing fiscally responsible states from being penalized by those with lax budgetary policies via inflationary pressures and interest rates is jeopardized as members breach the Stability and Growth Pact (SGP). Moreover, there are major institutional inconsistencies in how states are treated under the current framework as is exemplified by the November 2003 ECONFIN crisis. What is witnessed is an antagonistic relationship between the programmatic and operational dimensions of monetary governance. Does the fact that half the members who have adopted the euro have also breached its rules signal that surveillance as regulation is being displaced as a mode of governance? It calls for a re-imaged spatial-temporal explanation of governance to adequately capture the political economy of EMU. At the core of EMU management are risk and uncertainty based modes of governing. Employing a governmentality approach, I argue that the audit is one prominent style of processing and institutionalizing risk as an aggregate future of monetary activity. By altering the administration and objects of risk governance the audit is perceived as reducing the susceptibility to failure. Hence, it has a performative function that extends beyond simply measuring deficit or debt to GDP performance and acts as a social and institutional process structuring a homogenous set of fiscal practices.

The Economics of European Monetary Integration: The Pros and Cons of EMU Membership

2020 ◽  
Author(s):  
Donato Masciandaro ◽  
Davide Romelli
Keyword(s):  
Interest Rates ◽  
Monetary Union ◽  
Capital Mobility ◽  
Monetary Integration ◽  
European Monetary ◽  
Global Crisis ◽  
Real Convergence ◽  
Pros And Cons ◽  
The Stability ◽  
Two Stages

The recent global crisis challenged the stability of the European monetary integration process. That process, which is closely linked to the evolution of the European Monetary Union (EMU), has gone through two stages: the Common Market era, which ran from 1958 until 1993, and the Monetary Union era, which started in 1994 and gained new impetus after the global crisis with the publication of the Four Presidents’ Report in December 2012. The aim of the EMU has been to exchange rates, inflation and interest rates in order to boost capital mobility and trade, thereby promoting the growth of member countries. Thus far, the data shows that there has been nominal convergence of inflation and interest rates, while real convergence of per capita income has not occurred among the original euro area participants.

Searching for new fiscal rules in the euro area: a new proposal

2021 ◽  
Vol 18 (2) ◽  
pp. 145-159
Author(s):  
Jan Priewe
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Public Debt ◽  
Fiscal Rules ◽  
The European Union ◽  
Growth Pact ◽  
Fiscal Compact ◽  
The Face ◽  
The Stability ◽  
Interest Payments

While the European Union (EU) fiscal rules are suspended in the years 2020–2022, new rules are in the making and might be activated in 2023. If the old rules were used again, massive austerity would be required in the face of the strongly elevated level of public debt and the gap to the 60 per cent debt cap in the EU Treaty. A new proposal is suggested in this article which requires only small changes in the Treaty and/or the Fiscal Compact, but a strong overhaul in secondary law, that is, the Stability and Growth Pact. The key ideas are to use net interest payments, as a share of GDP, as the new metric for defining debt sustainability rather than gross public debt. This would allow the adjustment of the rules to changing monetary environments, especially interest-rate levels, and changing differentials between interest rates and growth rates. This way, much more fiscal space would be generated both for higher-debt and lower-debt member states and the entire euro area.

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