"Overcoming Europe s Policy Trilemmas: Economics, Politics and Governance in a Union Under Stress"

Transcription

1 "Overcoming Europe s Policy Trilemmas: Economics, Politics and Governance in a Union Under Stress" Marco Buti DG Economic and Financial Affairs European Commission Brown University, 31 October 2016

2 Outline 1. Overcoming Europe s Policy Trilemmas 2. A more balanced policy mix: fiscal policy 3. The role of structural reforms 4. Strengthening EMU governance 2

3 1. OVERCOMING EUROPE S POLICY TRILEMMAS 3

4 First inconsistent trinity: political integration Deep political integration More European federalism and a more accountable EU Inter-governmental decision-making and concern over democratic deficits Traditional democratic processes Nation-state institutions Domestic checks and balances, national vetoes (EU before the Single European Act) 4

5 Second inconsistent trinity: economic and social viability Unambitious structural reforms Gradually eroding the European welfare model Unsustainable levels of public debt Sound fiscal policies Sustainable welfare models Lack of job creation and growth 5

6 Third inconsistent trinity: Adjustment objectives in the Eurozone Inflation persistently below target Lack of rebalancing Persistent debt stifling growth Sustainability of high debt burdens Competitiveness gains in vulnerable economies 6

7 A new political synthesis Structural reforms to boost potential growth More balanced policy mix Strenghtening EU-dimension of policy making 7

8 2. A MORE BALANCED POLICY MIX: FISCAL POLICY 8

9 The legacy of debt 140 Public debt before and after the crisis (%GDP) 160 Public and private debt in the EU, average (%GDP) Change Average debt in Spain Ireland Italy Portugal EU average Source: AMECO and ECFIN calculations. 0 Government Private sector (HH and NFCs) (available data, simple average across EU Member States) 9

10 Fiscal Policy: EA vs. US 4 3 % of GDP Change in structural balance (growth rates in brackets) (Ŷ EA = 1.7) (Ŷ US = 3.3) (Ŷ EA = 3.3) (Ŷ US = 2.7) (Ŷ EA = 3.1) (Ŷ US = 1.8) (Ŷ EA = 0.5) (Ŷ US = -0.3) (Ŷ EA = 2.0) (Ŷ US = 2.5) (Ŷ EA = 1.6) (Ŷ US = 1.6) (Ŷ EA = -0.9) (Ŷ US = 2.2) (Ŷ EA= -0.3) (Ŷ US = 1.5) (Ŷ EA = 0.9) (Ŷ US = 2.4) (Ŷ EA = 1.7) (Ŷ US = 2.4) (Ŷ EA = -4.5) (Ŷ US = -2.8) US euro area Source: OECD April

11 How much fiscal space? A Blanchard-inspired framework b = p r y The normal interest rate (r*) has been falling Potential growth rates (y*) have also dropped Implications of Blanchard's model: Lower r* increases the fiscal space b: maximum politically sustainable debt Lower y* reduces the fiscal space p will probably decrease in the future p : maximum politically achievable fiscal surplus r*: normal interest rate y*: potential growth rate Source: Blanchard, O. J. (1984). Current and Anticipated Deficits, Interest Rates and Economic Activity. 11

12 3. THE ROLE OF STRUCTURAL REFORMS 12

13 What are structural reforms? Reforms tackle fundamental bottlenecks to economic growth and help economies to adjust to shocks by making them more flexible and reactive First years of the crisis: focus on competitionenhancing aspects, on adjustment (e.g. labour market flexibility) Moving forward: second generation of reforms (structural reforms 2.0) focus on enhancing human capital and tackling rent-seeking Structural reforms and income distribution: need for a fresh approach 13

14 % % % The impact of structural reforms on economies Model simulations of narrowing the gap with best performers by half 16 GDP (% difference) 10 Employment (% difference) 7 Government balance (% difference) BE DE EL ES FR IE IT PT 5 ys 10 ys Source: European Commission 0 BE DE EL ES FR IE IT PT 5 ys 10 ys BE DE EL ES FR IE IT PT 5 ys 10 ys 14

15 The Keynesian view vs. the political economy point of view of structural reforms Reforms can be painful in the short-term: in periods of high growth so as to compensate losers TINA: governments undertake difficult reforms only when they are with their back against the wall Who is right? The "Juncker curse" empirically founded? 15

16 Unemployment rate 2008 PMR 2013 Large reform efforts in countries under pressure Labour market reforms Reform effort ( ) and unemployment rate (2008) 12 2,0 Product market reforms Reform effort ( ) and level of regulation - PMR (2013) 10 ES 1,8 SI SK HR PT EL DE LV HU PL FR BE FI IE IT MT SE RO EE BG LT UK LU CZ SI AT NL CY DK Reform effort ,6 1,4 1,2 1,0 SE FR ES CZ EE HU FI DE DK NL UK BE AT IT SK 0,8 0,0 0,1 0,2 0,3 0,4 0,5 0,6 Reform Effort ( ) PT EL Source: European Commission Source: OECD (PMR) 1

17 4. STRENGTHENING EMU GOVERNANCE 17

18 The way forward: towards a more complete EMU 18

19 The way forward: Parallel progress on risk sharing and risk reduction Enforcement of fiscal rules at national level can be more efficient and more legitimate if completed with a central risk sharing tool More private risk sharing via Banking Union and Capital Market Union allows less fiscal risk sharing More fiscal risk sharing prevents overburdening the ECB 19