Along with monetary policy, fiscal automatic stabilisers remain the most appropriate economic stabilising instruments, but discretionary counter-cyclical fiscal policy has a role to play too, especially in the event of a sharp economic slowdown.
Along with monetary policy, fiscal automatic stabilisers remain the most appropriate economic stabilising instruments, but discretionary counter-cyclical fiscal policy has a role to play too, especially in the event of a sharp economic slowdown.
Since the onset of the global financial crisis, investments in the euro area were cut dramatically and they have not yet returned to their pre-2008 levels. Low levels of investments do not merely depress demand – a highly cyclical component – but also undermine an economy’s long-term growth potential. The article attempts to explain the recent evolution of euro area investment. More specifically, it investigates the factors hindering a capital spending revival and the European policy initiatives that have been taken to remedy the situation. From both an international and a historical perspective – i.e. compared with previous post-crisis periods – we are looking at a highly unusual state of investment’s recovery which drags on. There may possibly be a persistent component to the shortfall, in as much as it is an adjustment to previously excessive spending, particularly by households on residential property. That said, business investment has also yet to stage a major recovery. Focusing on business investment, it is apparent that subdued economic growth has combined with underutilised production resources to clearly reduce the necessity of such investment. But a weak business cycle alone does not explain business investment dynamics : this article draws on the accelerator model to demonstrate that a set of other factors also underlies the weak investment dynamics since 2012, e.g. uncertainty, financing restrictions, ongoing deleveraging and fragmentation of the financial markets. In addition to these short-term factors, a number of structural changes have taken place in the past decades, changes that may have triggered more secular trends. This is a complex theme, however, and it is unclear what the impact on capital spending has been of globalisation and the shift to a service-based society in advanced economies. Demographic trends, and particularly population ageing, are claimed by some to necessitate less investment, but one might equally argue that more capital-intensive production practices should be implemented to offset negative effects on growth. The euro area appears to be stymied in an unfavourable equilibria of slow economic growth and lagging investment. The Investment Plan for Europe attempts to break this adverse loop by increasing funding capacity through an investment fund, and by improving the general investment climate. Also known as the Juncker Plan, its aim was to generate € 315 billion of investment within three years – and a year on it looks more or less on track to achieve this aim. The same drive also saw the launch of the Capital Markets Union initiative, whose aim is to create a fully integrated European capital market in due course and which should make funding easier for SMEs. However, this initiative is still very much on the drawing board.
Since the onset of the global financial crisis, investments in the euro area were cut dramatically and they have not yet returned to their pre-2008 levels. Low levels of investments do not merely depress demand – a highly cyclical component – but also undermine an economy’s long-term growth potential. The article attempts to explain the recent evolution of euro area investment. More specifically, it investigates the factors hindering a capital spending revival and the European policy initiatives that have been taken to remedy the situation. From both an international and a historical perspective – i.e. compared with previous post-crisis periods – we are looking at a highly unusual state of investment’s recovery which drags on. There may possibly be a persistent component to the shortfall, in as much as it is an adjustment to previously excessive spending, particularly by households on residential property. That said, business investment has also yet to stage a major recovery. Focusing on business investment, it is apparent that subdued economic growth has combined with underutilised production resources to clearly reduce the necessity of such investment. But a weak business cycle alone does not explain business investment dynamics : this article draws on the accelerator model to demonstrate that a set of other factors also underlies the weak investment dynamics since 2012, e.g. uncertainty, financing restrictions, ongoing deleveraging and fragmentation of the financial markets. In addition to these short-term factors, a number of structural changes have taken place in the past decades, changes that may have triggered more secular trends. This is a complex theme, however, and it is unclear what the impact on capital spending has been of globalisation and the shift to a service-based society in advanced economies. Demographic trends, and particularly population ageing, are claimed by some to necessitate less investment, but one might equally argue that more capital-intensive production practices should be implemented to offset negative effects on growth. The euro area appears to be stymied in an unfavourable equilibria of slow economic growth and lagging investment. The Investment Plan for Europe attempts to break this adverse loop by increasing funding capacity through an investment fund, and by improving the general investment climate. Also known as the Juncker Plan, its aim was to generate € 315 billion of investment within three years – and a year on it looks more or less on track to achieve this aim. The same drive also saw the launch of the Capital Markets Union initiative, whose aim is to create a fully integrated European capital market in due course and which should make funding easier for SMEs. However, this initiative is still very much on the drawing board.
In the past few years it has become painfully clear that the financial markets’ loss of confidence confronting certain euro area countries can swiftly spread to other Member States, ultimately threatening the orderly functioning and stability of the euro area as a whole. Back in 2007, before the financial crisis, vulnerable positions had become apparent within the euro area. In the absence of adequate fiscal discipline, the initial budgetary position of several euro area countries was not very strong. Moreover, there were wide divergences in competitiveness and domestic demand within the euro area, and the situation in some Member States had become particularly fragile owing to structural losses of competitiveness or property market bubbles combined with the accumulation of household debts, or because of the vulnerable state of the banking sector. Decision makers and financial markets have long underestimated the importance of these macroeconomic imbalances. The coordination of economic policies fell short of the ambitions : the way in which the fiscal rules were interpreted and applied was too flexible, and the macroeconomic surveillance of structural policy was insufficiently rigorous. However, following the financial crisis of 2008-2009, it became apparent that these imbalances had a destabilising effect. Aware of the seriousness of the situation, the European Council had already at the beginning of 2010 decided to strengthen the economic governance of the European Union (EU), including its fiscal rules. The Van Rompuy task force was set up, and the European Commission (EC) drafted six legislative proposals which were formally approved in amended form by the European Parliament and the Ecofin Council in the autumn of 2011 (the “Six-Pack”). The EC then proposed two additional regulations to ensure more rigorous budgetary surveillance (the “Two-Pack”). In addition, the EU Member States – except for the United Kingdom and the Czech Republic – concluded a new intergovernmental treaty on stability, coordination and governance in the Economic and Monetary Union. In parallel with these measures to strengthen governance within the EU, various mechanisms have been set up since the beginning of 2010 to contain the debt crisis, and a number of Member States have received emergency funding from the EU and the International Monetary Fund.
The article outlines the current budgetary situation, explains why consolidation plans are urgently needed and provides an answer to the question as to what form those plans should preferably take. It also contains an insight into the strategies aimed at consolidating public finances. The financial crisis and the resultant economic recession have seriously undermined the health of public finances in almost all the developed economies. Budget deficits and public debt have risen sharply and these budgetary problems will not disappear automatically once the economy has fully recovered from the recession. On top of this, the budgetary impact of the ageing of the population could drive up budget deficits and cause public debt to rise even more quickly. To restore the sustainability of public finances, extensive consolidation efforts are required in a wide range of countries. Although a rapid and significant consolidation effort implemented simultaneously by a large group of countries could act as a brake on the economic recovery to some extent, a postponement of consolidation efforts, on the other hand, could shake the confidence of economic agents, give rise to financing risks and trigger a strong rise in interest rates. To remove doubts about the creditworthiness of countries, it is therefore advisable not to delay the announcement of concrete and credible austerity plans, even if the measures will only be implemented in the years to come. The timing and scope of consolidation efforts are dependent on country-specific circumstances. The scope of the consolidation efforts needed in most countries means that no limitations can be imposed with regard to the composition of consolidation plans. However, preference needs to be given to structural measures that reduce non-growth-promoting government expenditure or can dampen the increase in ageing-related expenditure. In spite of the already heavy burden of compulsory taxation in many countries, extra government revenues cannot be ruled out. Most countries have now begun preparing budgetary exit strategies. So there is some prospect of budgetary objectives that will herald a return to healthy public finances. In some countries, concrete austerity measures have already been worked out in the meantime. In other countries, plans of this type have yet to be detailed. However, firm government action is urgently required for this latter group of countries too, all the more so since postponing the necessary consolidation efforts would entail major risks.
The European Union budget has a number of specific characteristics which make it different from the budgets of the Member States : in principle, it must never be in deficit, and there is a special decision-making procedure. The structure and maximum expenditure are specified for a 7-year period in the Financial Perspective. In relation to GDP and national budgets of the Member States, the EU budget is small. It is increasingly funded on the basis of the size of the gross national income of each Member State whereas import levies and VAT-based transfers from the Member States are becoming less important. The United Kingdom receives a special rebate. The importance of the Common Agricultural Policy, historically the largest EU expenditure item, is steadily diminishing in favour of expenditure on cohesion policy. Since the beginning of the 1990s, the Common Agricultural Policy has undergone a radical reform. Opinions differ on the contribution made by the cohesion policy towards income convergence between regions in the EU. The Commission’s proposals regarding the Financial Perspective for 2007-2013 embodied an important increase in expenditure and placed the emphasis on the attainment of the Lisbon objectives. Protracted negotiations at European Council level led to a compromise in December 2005 and following difficult negotiations with the European Parliament, a new Interinstitutional Agreement was signed on 17 May 2006.
One of the most remarkable characteristics of the world economy today is the enormous, ever worsening US balance of payments current account deficit, which reached a record level of 5.7 p.c. of GDP in 2004. This has given rise to concerns in academic and political circles regarding the sustainability of the current situation and the potential dangers for the global economy of a sudden, disorderly adjustment. The size of the US current account deficit is not only unprecedented in American post-war history, but it also seems to be exceptional from an international perspective. Moreover, the US deficit contrasts with a surplus in virtually every other region and the problem has consequently taken on a global dimension. The increase in the US current account deficit recorded in the nineties reflects an internal American shortfall in savings. Whereas the private savings-investment equilibrium was restored in 2002 and 2003, the same period saw a huge deficit in the public sector budget. The start of the new millennium brought notable changes in the way the US current account deficit was financed since investments by Asian public authorities in American government debt instruments largely took over the position previously occupied by European private foreign direct investments and investments in equities. It is sometimes put forward that the US, unlike other countries facing similar circumstances, is safeguarded from an attack on its currency because of its prominent role in the international financial system. According to an influential school of thought in economic literature, the current international system can even be seen as a “revived” Bretton Woods system. Indeed, a number of East-Asian countries, including China, use a fixed or quasi-fixed exchange rate against the dollar, which brings to mind an informal dollar standard. Although this set of circumstances has undoubtedly offered various regions in the world a number of mutual benefits during recent years, these exchange rate relations may nevertheless have caused some distortions in US spending, whereas Asian countries have to deal with a growing exchange rate risk on their official reserves. Different scenarios are conceivable to deal with the global imbalances. The results of model simulations show the huge effort required to significantly reduce the US current account deficit which highlights the scale of the problem, emphasising the need for simultaneous economic policy measures in the different economies involved. The concern over global imbalances and the development of exchange rates also feature prominently on the agenda of international forums such as the G7 or G20 meetings. In the statements issued at those meetings, the need for a common approach to tackle the global imbalances is given priority and the belief that excessive exchange rate volatility is not desirable is underlined.
