2. Fiscal Governance
2.1 Fiscal policy Rules
2.2 Independet fiscal institutions
2.3 Medium-term budgetary frameworks
2.4 The theory of optimum currency areas
3. Risks and bailout in the European Monetary Union
4. The European Centrall Bank
4.1 Goals of the ECB and monetary policy
4.2 Instruments of the ECB
5. How advanced ist the European Union
In the following home-exam I will write about the monetary and fiscal policies in Europe with the research question, does the EU do it right or wrong? I have chosen this topic because it is a current important but also very complex debate with different points of view.
It starts with a the first point of my exam, the fiscal governance. It includes the fiscal policy rules, independet fiscal institutions, frameworks and the theory of optimum currency areas. The next point which is produced by the optimum currency areas, is the risk and bailout in the European Monetary Union. After this fiscal part I will focus on the topic of monetary policy. It includes the European Central Bank with it councils. The following part are the goals of the ECB and monetary policy. An interesting question like “does only price stability matter?” will be answered. Afterwards I am going to write about the complexe instruments of the ECB. Near to the end I will give some important arguments for the question “how advanced is the EU right now?”
The last part is the conclusion. It will include all important facts of this work and answer the research question.
2. Fiscal Governance
A universal definition for the fiscal governance are rules, many procedures and also regulations which influence the way on how budgetary policy is planned, approved and monitored. To name the main objectives of the fiscal governance for example, is reducing the cyclicality of fiscal policy making and to improve the efficiency of public spending. Moreover, attaining a good budgetary position especially by containing the deficit tendency to lead unsustainable fiscal policies giving rise to high deficits and increasing debt ratios (European Commision, online).
Why is fiscal governance important?
”How can sound and sustainable public finances be ensured? In practice, public debt-to- GDP ratios across many EU Member States have followed an upward trend since the mid 1970s implying a growing burden on future generations. Recently, the fiscal impact stemming from the financial and economic crisis has further increase debt ratios intensifying the need for fiscal consolidation in view of ageing population. Policy experiences show that strong fiscal governance is an important factor for fiscal performance insofar as it can help contain the deficit bias of fiscal policy making, which was frequently observed across EU Member States over the past decades. This has also been acknowledged by the European Council which in the reform of the Stability and Growth Pact in 2005 asked EU Member States to strengthen their domestic fiscal governance through fiscal rules and institutions ” (European Commision, online).
2.1 Fiscal Policy rules
Fiscal policy rules are numerical aims or moreover a pressure for the right budgetary. There are some indicators of the fiscal outcome, for example the debt, government budget balance, or revenue developments. Fiscal rules only work if there is a strong political commitment, enforcment and monitoring.
There is a database which collects information from all EU member states. The dataset knows relevant indicators about every state, budget balance, debt and expenditure. The database is important for the monitoring and enforcment mechanism.
The next important component is the fiscal rule strength index.
To react on budgetary imbalances the fiscal rules need to be equipped with some special characteristics in the institutional framework of budgetary policy.
To know whether there is an offense in the regulation or not, there exists an index:
”1. Description of the rule
This section requires Member States to provide information on the general characteristics of the rule (targeted variable, coverage), the motivations for its introduction, and the relevant dates of introduction, entering into force and major reform.
2. Coverage and target definition
This section includes questions concerning the sectors and the time span (annual / multiannual) covered by the rule. This section also deals with the specification of the targeted aggregate (definition of the variable and accounting system in which it is expressed, exclusions from the coverage of the rule, ratios vs. level and growth rates, aggregates defined in nominal vs. real term).
3. Statutory base of the rule
This section allows to make a distinction between rules based on political commitments (coalition agreements, agreement reached by different levels of government), and those based on legal acts (law, constitution).
4. Monitoring of compliance with the rule
This section requests information on the body responsible for the monitoring of the rule. Answers provided by Member States give important indications on whether the rule is monitored by a partisan or a non-partisan institution and whether monitoring of compliance with the rule is ensured in real time or only ex post.
5. Enforcement of compliance with the rule
This section contains questions related to the body in charge of ensuring enforcement of the rule (partisan vs. non-partisan) and the description of actions in case of non-compliance (obligation to propose corrective measures for the relevant authority, automatic correction mechanisms, possibility of imposing sanctions, existence of-well-defined escape clauses).