Numerical Compliance with EU Fiscal Rules: Facts and Figures from a New Database

Larch, Martin; Malzubris, Janis; Santacroce, Stefano

doi:10.2478/ie-2023-0008

Cited by 15 publications

(5 citation statements)

References 9 publications

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“…The changes included an easing of the medium-term objectives so that they reflected each country’s unique economic situation, more flexibility for ECOFIN when assessing the fiscal positions of member states with an emphasis on effort rather than outcomes, and a focus on moving toward cyclical balances as opposed to setting specific dates for member states to comply with the 3% deficit rule (Morris et al ., 2006; Thygesen et al ., 2019). These changes culminated in a structural balance rule where member states that have not achieved their medium-term objective are expected to improve their structural balance by at least 0.5% of GDP or be within 0.5% of their medium-term objective (Morris et al ., 2006; Raudla and Douglas, 2021; Larch et al ., 2023).…”

Section: The Eurozone Experiencementioning

confidence: 99%

“…The EU fiscal rules were reformed again in the aftermath of the Great Recession and the corresponding rise in member state debt loads. The six-pack instituted several important reforms in 2011 (Buti and Carnot, 2012; Thygesen et al ., 2019; Raudla et al ., 2020; Larch et al ., 2023; Keel, 2023). First, it put into place the European Semester, which increased EU monitoring of member state economic and fiscal conditions.…”

Section: The Eurozone Experiencementioning

confidence: 99%

“…For example, a majority of Eurozone countries were above the 60% debt-to-GDP level prior to the COVID crisis in 2019 [9], and some member states have continued to engage in procyclical behavior (Thygesen et al ., 2019). However, compliance with the rules has improved since the passage of the six-pack, and fewer countries have found themselves subject to the excessive deficit procedure (Thygesen et al ., 2019; Larch et al ., 2023). This is important because compliance with the rules is associated with countercyclical policies (Larch et al ., 2021).…”

Section: The Eurozone Experiencementioning

confidence: 99%

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Do balanced budget practices of U.S. states make sense? Alternatives from the Eurozone

Douglas,

Raudla

2024

JPBAFM

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Purpose The purpose of this article is to challenge the balanced budget practices of U.S. state governments and offer alternatives that may lead to better fiscal, economic and policy outcomes. We contend that the norm of balance may be leading U.S. states to make fiscal decisions that result in less-than-ideal outcomes, especially during economic downturns.Design/methodology/approach This is a normative article. We examine the scholarly evidence regarding balanced budget practices to assess the appropriateness of balanced budget norms. We also examine the fiscal rules followed by Eurozone countries to draw potential lessons for U.S. states.Findings We conclude that state governments should move away from strict norms of budget balance and seek more flexible approaches. We suggest that instead of following strict rules and norms of balance, U.S. states should consider implementing escape clauses, debt and deficit ceilings, and fiscal councils. We also suggest that the Federal Reserve be open to lending directly to states during fiscal crises to ensure that states have access to affordable credit.Originality/value The balanced budget norm has become ingrained in U.S. state budgeting practices, so much so that public officials and scholars alike rarely question it. The novel contribution of our article is to question this practice in a systematic way and propose alternative approaches.

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Section: The Eurozone Experiencementioning

confidence: 99%

Section: The Eurozone Experiencementioning

confidence: 99%

Section: The Eurozone Experiencementioning

confidence: 99%

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Do balanced budget practices of U.S. states make sense? Alternatives from the Eurozone

Douglas,

Raudla

2024

JPBAFM

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“…The EU fiscal rules aim to maintain the stability of public finances (see Larch et al, 2023). In the literature on fiscal rules, we observed two main approaches.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Selected method for determining fiscal targeting rules: Results for Poland

Przybylska-Mazur

2024

IER

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The objective of the article is the presentation of a selected method for determining fiscal targeting rules. The proposed fiscal rules make it possible to achieve the intended goals. In this article, the main goal of fiscal policy was the minimisation of deviations of the general government debt-to-GDP ratio from the target value. In the proposed method for determining fiscal targeting rules, we also considered the minimalisation of deviation of the inflation rate and output gap from their target values. We present the results of the empirical analysis for Poland. Research Design & Methods:The main design was quantitative. We used the modelling method. We applied the dynamic optimisation method for determining fiscal targeting rules. The fiscal targeting rule was the solution of selected dynamic optimisation problems with an infinite time horizon and discounting. We used the minimisation problem of the intertemporal loss function. We performed empirical analysis for quarterly data from the first quarter of 2011 to the third quarter of 2022 for Poland. We used the Bellman equation and the envelope theorem. Findings: In this article, we determined the fiscal targeting rule. This rule, determined as a solution to the minimisation problem of the intertemporal loss function, allows for the calculation of optimal values of the general government debt-to-GDP ratio while also considering the minimisation of deviations of the inflation rate and the output gap from their target values. We could observe the same direction of the optimal values of the debt-to-GDP ratio in different considered cases, but there is a different shift along the axis of ordinates. We could observe that reducing debt during good economic times allows for achieving an acceptable level of the debt-to-GDP ratio during a crisis. Implications & Recommendations:To minimise the intertemporal loss function, a portion of the financial resources accumulated during non-exceptional periods should be utilised during crises and shock events. Considering other variables such as inflation and the output gap when deciding on the value of the debt-to-GDP ratio, we noted that the fiscal convergence criterion for debt was not always fulfilled. Contribution & Value Added:In this article, we present a method of determining fiscal rules not only considering the general government debt-to-GDP ratio, but also considering such variables as the inflation rate and the output gap, as well as other variables such as general government balance to GDP ratio and the monetary policy instrument -the interest rate. The novelty of the article is also the determination of the fiscal targeting rule as a solution to the minimisation problem of intertemporal loss function. Thus, they make it possible to determine the optimal general government debt-to-GDP ratio, considering also the minimisation of deviations from the inflation rate and the output gap from their target values. Article type:research article

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“…The EU-27 includes: Belgium (BE), Bulgaria (BG), Czechia (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IR), Greece (GR), Spain (ES), France (FR), Croatia (HR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), Netherlands (NL), Austria(AT), Poland (PL), Portugal (PT), Romania (RM), Slovenia (SL), Slovakia (SK), Finland (FI) and Sweden (SE).3 In a recent studyLarch et al (2023) introduces a novel database that systematically tracks numerical adherence to the four primary rules outlined in the Stability and Growth Pact (SGP), commencing in 1998 Larch et al (2023). examine the compliance with the SGP rules, finding compliance in slightly over half of the EU member states.…”

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confidence: 99%

Dynamic panel analysis of the EU's fiscal reaction function with threshold effects

Mamatzakis

2024

Kyklos

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This study contributes to the ongoing reform of the EU's economic governance, particularly about fiscal performance. We opt for a fiscal reaction function of the cyclically adjusted primary balance. Given concerns over underlying endogeneity and heterogeneity across countries we employ a threshold dynamic analysis. The findings confirm that the fiscal policy in the EU has been procyclical overall. However, we identify two regimes of output gap. Fiscal policy has been countercyclical for EU member states in the higher output gap regime while EU member states follow a procyclical fiscal policy in the lower regime. We reveal also that the endogenous debt‐to‐GDP ratio threshold is at 75.6% for the EU and 78.7% for the Euro area, which notably exceeds the EU Treaty's reference value of 60%. Fiscal rules and fiscal councils mitigate procyclical fiscal policies, being more effective for low debt countries. In terms of policy implications, the identified fiscal thresholds and variability across countries warrant a higher degree of fiscal coordination in the EU, particularly in the Euro area.

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Numerical Compliance with EU Fiscal Rules: Facts and Figures from a New Database

Cited by 15 publications

References 9 publications

Do balanced budget practices of U.S. states make sense? Alternatives from the Eurozone

Do balanced budget practices of U.S. states make sense? Alternatives from the Eurozone

Selected method for determining fiscal targeting rules: Results for Poland

Dynamic panel analysis of the EU's fiscal reaction function with threshold effects

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